The bond yields fell on Tuesday on expectations the US Federal Reserve could cut interest rates in the near term to ease tightening credit conditions and help settle volatile markets.
The yield on the benchmark 10-year bond ended at 7.96%, lower than Friday’s close of 7.99%. ?The signs from the global markets about a likely Fed rate cut are strong. Bonds gained primarily on this factor,? a trader at a foreign bank said.
Financial markets are speculating the Fed may cut its benchmark federal funds rate ahead of its next policy meeting in September. US Treasuries were stronger on Tuesday, with short-dated bonds racking up a ninth session of robust gains. The Fed cut its discount rate — the rate at which banks can borrow funds from the central bank — by half a percentage point to 5.75% on Friday and signalled a willingness to take more action to cushion the economy from the credit troubles.
Overnight cash rates ended at 6.15-6.25%, near the central bank’s short-term reverse repurchase rate of 6%, which traders said was a sign that cash was easily available in the local market.
Reserve Bank of India is selling Rs 14,500 crore worth of bonds and bills this week. Bank deposits are growing at an annual rate of nearly 25%, up from about 21% a year earlier.
RBI received bids totaling Rs 10,190 crore through reverse repo auction under its liquidity adjustment facility from the banking system, reflecting comfortable cash conditions.
The rupee shrugged off a 3% fall in local stocks to end stronger on Tuesday, with traders saying a rise in US stock futures was supportive and should encourage investors to bring some money back to India.
The rupee ended at 41.08/09 per dollar, moving up from Friday’s 41.33/34, having briefly breached the 41 mark to hit a high of 40.97 during trade. Local currency markets were closed on Monday for a holiday.
?Wall Street is looking good, which means the Sensex will do well tomorrow, and the rupee market already has priced that in,? said a senior dealer with a private bank. US stock futures rose after the Chinese central bank raised interest rates and also on hopes the Federal Reserve might take additional steps to shore up credit markets.