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RBI policy review triggers rally in bonds

, ET Bureau|
Apr 05, 2018, 08.59 PM IST
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MUMBAI: Indian bond yields fell to their lowest in nearly four months Thursday after the central bank said it expects the price gauge to climb more slowly than estimated earlier, suggesting that Mint Street would decouple its rate action from the US Federal Reserve’s current cycle of increases.

The favourable commentary on consumer prices in Asia’s third-biggest economy points to stable future rates that were otherwise expected to mirror hardening global trends in the cost of financing. For the next six to nine months, the markets should be relatively calm, with concerns of rate increases fading in an economy where yields unexpectedly surged in the December quarter.

“Fears of a rate increase have faded materially for now,” said Naveen Singh, head of government securities trading at ICICI Securities Primary Dealers. “With a significant reduction in the inflation forecast for April-September (H1), it is likely that the central bank would hold rates in foreseeable future.”

Investors rushed to buy government bonds as the central bank commentary filtered through toward the latter half of the trading day. Some traders who had bought sovereign securities more than a week ago exited their holdings by booking profits on a day the benchmark yield dipped 17 basis points to 7.13%.

Bond yields and prices move in opposite directions.

The Reserve bank of India (RBI) has projected retail inflation in the range of 4.7-5.1% in the first half of the new financial year, compared with 5.1-5.6% forecast in the February bi-monthly policy. The central bank has cited softer food inflation on the assumption of a normal monsoon and effective supply management by the government.

“Bringing down the inflation projection was the key trigger for the bond rally,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts, which is engaged in the central bank's weekly auction of government bonds. “The exuberance has helped increase trading volumes.”

The benchmark bond sales volumes shot up more than Rs 30,000 crore Thursday after a spell of relatively muted trading in recent months.

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