Indian government bond yields are set to be little changed on Friday, with a downward bias in early deals, as traders continue to be optimistic about some form of monetary policy easing from the central bank, whose decision is due later in the day.
The benchmark 10-year yield is likely to move between 6.66 per cent and 6.68 per cent till the announcement of the decision, a trader with a private bank said, compared with its previous close of 6.6802 per cent.
“Finally the big day is here, and the run up to the main event has been eventful, with yields poised to fall further if the decision favours the doves,” the trader said.
Bond yields and overnight index swap rates have eased as investors expect some form of policy easing after India’s economic growth slowed to a seven-quarter low of 5.4 per cent in the July-September quarter.
The 10-year benchmark bond yield slid 12 basis points (bps) to a three-year low after the growth data last Friday, while swap rates have plunged around 20 bps. The spread between the 10-year yield and the central bank’s key interest rate has also tumbled to a seven-year low.
The indicators are pointing to an easing, which if not done via rates, could instead be done through the infusion of liquidity including a cut in the cash reserve ratio (CRR).
While a majority of market participants expect a status quo on rates, Nomura and ANZ anticipate a 25-bp rate cut from the Reserve Bank of India (RBI).
“Since inflation is only a vegetable price problem (transient) and monetary policy can’t do much about that, it does not make sense to me to keep rates high when growth is clearly in need of support,” said Dhiraj Nim, an economist and FX rates strategist at ANZ.
Meanwhile, the 10-year U.S. yield eased further on Friday ahead of the November nonfarm payrolls report, due after Indian market hours, that could help determine the pace of Federal Reserve rate cuts.
The odds of a 25-bp U.S. rate cut in December have risen to 71 per cent, up from 67 per cent last week. KEY INDICATORS: ** Brent crude futures were 0.3% lower at $71.85 per barrel after easing 0.3 per cent in the previous session ** Ten-year U.S. Treasury yield was at 4.1761 per cent; two-year yield was at 4.1522 per cent ** India to sell sovereign bonds worth ₹30,000 crore ($3.54 billion) ** RBI to set underwriting fees for ₹30,000 crore for sovereign bond auction ($1 = 84.6850 Indian rupees)