With inflation easing consumer inflation for September came in at 6.46% and crude oil prices falling by a steep $20 per barrel since August, its not surprising bonds are rallying.
While bond traders are aware the Reserve Bank of India (RBI) will take no chances since it has repeatedly made it clear it wants to tame inflation once and for all, they appear to be pricing in a rate cut sooner than was earlier anticipated.
So while the central bank may leave the repo rate untouched at 8% on December 2, theres hope the repo rate may be trimmed early next year the trend in interest rate swaps is a clear giveaway.
With chances of consumer inflation falling off to 6% by January 2016 now looking much brighter the 8% by January 2015 is a done deal and industrial output slumping to 0.4% in July and August, the central bank may just act. To be sure, the RBI has reminded the markets that it will be taking cognisance of favourable base effects but the markets appear to be hopeful. Foreign investors seem to be taking no chances and have upped their tally to a record $21.4 billion in 2014.