Tuesday, November 18, 2008

Indian bond yields drop on rate cut expectations

Indian federal bond yields fell on Tuesday, shrugging off concerns over heavy government borrowing, after the finance minister said more steps would be taken to stimulate the economy.

Palaniappan Chidambaram also met the Reserve Bank of India (RBI) Governor Duvvuri Subbarao on Tuesday, bolstering expectations the monetary policy may be eased further. [ID:nBOM139236]

The benchmark 10-year bond yield ended at 7.46 percent, compared with Monday's close of 7.51 percent.

"There are strong expectations that the RBI may cut rates and this is helping sentiment," a dealer with a private sector bank said.

The 10-year yield initially rose to 7.64 percent as traders were wary of more government borrowing after Monday's announcement of a 90 billion rupees ($1.8 billion) bond auction on Friday.

The government's finances are strained due to increase in salaries of government employees, higher subsidies on fuel and fertilisers, waiver of farm loans as well as fall in tax revenues following a slowing economy.

The central bank will also sell 48.5 billion rupees of 10-year loans for state governments on Thursday.

The central bank has aggressively cut its rates over the past two months.

The repo rate has been cut by 150 basis points to 7.5 percent since October and the cash reserve ratio, the proportion of deposits that banks have to keep with the central bank, has been reduced by 350 basis points to 5.5 percent. ($1 = 49.7 rupees)

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