Bond yields tad lower tracking oil, RBI policy awaited

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MUMBAI: Indian government bond yields were marginally lower on Thursday, tracking a fall in global oil prices, with market participants awaiting the Reserve Bank of India’s monetary policy decision due on Friday.
India’s 10-year benchmark bond yield was at 7.2238%, as of 0500 GMT, after falling to 7.2063% in early trade. The yield had ended at 7.2416% on Wednesday, snapping a nine-day losing streak.
“There is some move tracking oil, but the policy decision is the major factor and though a rate hike is largely priced in, the future guidance from the (RBI) governor will drive the markets,” a trader with a state-run bank said.
Market participants remain divided over the quantum of rate hike, with views widely split between 25 basis points and 50 basis points, according to a Reuters poll of economists.
HDFC Bank said it expects the central bank to hike rates by 35 or 50 bps, as inflation fears have moderated but have not disappeared completely.
“We expect the terminal rate in this cycle to be at 5.75%, contingent on how both inflation and growth prints progress over the coming quarter, especially considering rising global growth headwinds and the brewing energy crisis in Europe,” the bank said in a research note.
The RBI has raised the repo rate by 90 basis points to 4.90% since embarking on a tightening cycle at an unscheduled policy meeting in May, to curb inflationary pressures.
Market participants expects inflation to ease in July after remaining above 7.00% for three straight months. Barclays expects the reading at 6.65% on lower food prices.
Traders said bonds could see another round of rally, if the central bank goes for a 35-bp rate hike and its commentary is not very hawkish.
“If there is a hint that future rate hikes will be limited as well as staggered in nature, then benchmark bond yields could touch 7.15% levels, though profit-booking may cap any major fall from that point,” a trader with a primary dealership said.

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