Government bond yields slipped further to hit a 16-month low on Friday amid speculation that the sharp fall in oil prices and the not-so-subtle call for rate cuts from the finance minister would force the RBI to act.
The yield on the benchmark 10-year 8.40%, 2024 bond ended at 8.09%, the lowest since August 1, 2013. The yield has dropped 35 bps over the last two months on such expectations. Yields are poised to fall more, feels Jayesh Mehta, country treasurer at Bank of America-Merrill Lynch. Mehta predicts that the 10-year yield could ease to 8% before end of March.
Most bond traders are betting on a rate cut, especially after finance minister Arun Jaitley recently cited the sluggish economic growth and made a case for it.
“The market is hoping that Jaitley will convince Rajan of a rate cut next week,” said a senior bond trader at a public sector bank. Jaitley is likely to meet RBI governor Raghuram Rajan on Monday to discuss monetary policy.
Indeed, the staggering $30-per-barrel fall in global crude oil prices since June has made the outlook on domestic inflation, which has already fallen to 5.52%, more benign. Brent crude prices were near four-year lows on Friday after oil producing countries decided to not cut production.
Market participants hope that the RBI’s target of 6% inflation for January 2016 will be easily achieved now even if price pressures flare during the next year.
Further, data released after market hours showed that the GDP grew 5.3% in July-September.
Adding to this string of positives is the fall in US bond yields as well. The yield on the 10-year US treasury note has slipped 10 bps over the last one month. This keeps the interest rate differential between India and US wide and, thereby, the attractiveness of Indian paper to foreign investors.