India bond rally gets dovish RBI push, rate cut bets gain ground

Indian government bonds are set to continue their uptrend on Thursday, after the minutes of the central bank's latest meeting bolstered expectations of a rate cut in the next meeting.

The yield on the benchmark 10-year note may sway between 6.45% and 6.50%, a trader at a private bank said, after closing at 6.4799% on Wednesday.

Bond yields move inversely to prices.


"The minutes have further strengthened bets of a rate cut from the Reserve Bank of India in less than two months, and that will be reflected in the early part of the session. But, there could be some profit booking also, which may cap the rally," the trader said.

Members of India's interest-rate panel flagged room for future rate cuts as the country's inflation outlook eases, minutes of the October meeting showed on Wednesday.

"The benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth," RBI Governor Sanjay Malhotra said in the minutes.

Earlier this month, the RBI held interest rates, while two members of the rate panel favored a change in stance to "accomodative" from "neutral".

India's retail inflation dropped to 1.54% in September, an eight-year low, supporting the call for a rate cut in December.

External member Ram Singh said India's current low inflation rate "is neither conducive for businesses nor for public finances." in the minutes.

While most economists project just a December rate cut, Nomura, MUFG and Capital Economics expect the central bank to lower rate by 25 bps in February as well.

RATES

India's overnight index swaps (OIS) are expected to inch lower.

The one-year OIS rate closed at 5.42% on Tuesday, while the two-year rate was at 5.34%. The five-year rate settled at 5.5825%.

KEY INDICATORS:

** Benchmark Brent crude futures were 0.8% higher at $62.40 per barrel, after easing 0.8% in previous session

** Ten-year U.S. Treasury yield at 4.0224%; two-year yield at 3.4910%.