MUMBAI: Indian government bond yields ended higher on Friday and for the week after the central bank maintained interest rates and signalled a hawkish inflation outlook for next year.
The yield on the benchmark 10-year bond ended at 6.4121%, after closing at 6.3861% on Thursday. The yield rose 4 basis points for the week.
The Reserve Bank of Indian held rates steady on Wednesday, kept the growth forecast unchanged, and said it expects inflation to rise above 4% from January. This, along with the lack of any dovish cues, triggered a large selloff after the decision, dampening rate cut expectations.
New Delhi sold bonds earlier on Friday, with the auction seeing strong demand. This was despite fears of weak interest after the RBI decision.
“The demand assured the market, which pushed the benchmark bond yield below the key support level of 6.38%,” a trader at a private bank said.
Meanwhile, July retail inflation is set to ease to an eight-year low of 1.76% versus 2.10% in June, per a Reuters poll.
The market is now divided, with several analysts saying the economic outlook suggests no further rate cuts, although others expect growth and inflation to undershoot forecasts, which may open the door to at least one more reduction.
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UBS Securities expects inflation to average at 3% this year, and expects the terminal repo rate to fall to the 5.0%-5.25% range.
“For now, we add one 25 bps rate cut in October meeting to our baseline, with risk of another if growth surprises lower driven by US trade tariffs,” said Tanvee Gupta Jain, chief India economist at UBS Securities.
Rates
India’s overnight index swap rates were little changed, while the longer duration swap moved lower.
The one-year OIS rate ended at 5.50% and the two-year OIS rate ended at 5.4550%. The liquid five-year OIS rate finished at 5.67%.
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