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Bond yields fall as rate-cut hopes strengthen

Investors lapped up bonds, pushing the yields lower, expecting a rally in debt securities as RBI accelerates its rate cuts to revive economic growth.

, ET Bureau|
Updated: May 15, 2013, 04.46 AM IST
MUMBAI: Yields on debt instruments fell across the board - from commercial paper to government securities - as inflation reading at a 41-month low fuelled optimism that RBI governor Duvvuri Subbarao will be forced to cut policy rates despite his declared stance of limited room.

Investors lapped up bonds, pushing the yields lower, expecting a rally in debt securities as the central bank accelerates its interest rate cuts to revive economic growth. Bond prices and yields move in opposite direction.

"The rates can further drop if liquidity conditions ease," said Rahul Goswami, chief investment officer, fixed income, ICICI Prudential Asset Management Company. "So there will be a downward bias in rates, subject to how liquidity conditions improve or worsen along with rate actions from the RBI." Rates of three-month commercial papers such as the Indian Oil touched 8.38%, the lowest since November 2010. Rates across tenors are trading in the range of 8.1-8.5%, down from 9.7% in March. Three-month T- bills are trading at 7.43%, the lowest since April 2011, and yields on ten-year government benchmark bonds are at 7.47%, lowest in three years.

Hopes of interest rate cuts are gaining momentum, despite the governor saying to the contrary in his annual monetary policy review on May 3. Wholesale prices in April grew at 4.8% year-on-year, lower than 5.6% in March, and core inflation or manufacturing inflation, that is, prices of manufactured goods, rose by 2.8% in April from 3.2% in March on reduced input cost. Consumer price inflation, which has hovered above 10% in the past few quarters, dropped to 9.39% in April on a y-o-y basis, from 10.39% in March . RBI has cut key policy rates by 125 bps since April last year, including a rate cut of 25 basis points on May 3, which has reflected in the way the short-term rates have moved this month.

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