By Dharamraj Dhutia
MUMBAI (Reuters) -Indian government bond yields and overnight indexed swap rates crashed on Thursday, after the Reserve Bank of India, in an unexpected move, kept policy rates unchanged against wide expectations of a rate hike.
The 10-year benchmark 7.26% 2032 bond yield was at 7.1924% as of 11:25 a.m. IST, after closing at 7.2750% on Wednesday. The yield had fallen to a near seven-month low of 7.1469% after the decision.
The one-year OIS rate crashed 20 basis points to 6.60%, while the five-year swap rate dropped 22 bps to 6.04%, which is also its lowest level in two months.
The liquid five-year 7.38% 2027 bond yield crashed as much as 16 bps to 7.01% after the policy decision.
The RBI held its key repo rate steady on Thursday after six consecutive hikes, saying it was closely monitoring the impact of recent global financial turbulence.
Most analysts had expected the central bank to deliver one final hike of 25 bps in the current tightening cycle, which has seen it raise the repo rate by a total of 250 bps since May.
“We could see the RBI now going on an extended pause throughout FY24 while liquidity conditions continue to tighten. Short term yields could therefore continue to see some pressure,” Sakshi Gupta, principal economist at HDFC Bank said.
The RBI expects inflation at 5.2% and projects growth at 6.5% for the next financial year, with risks evenly balanced.
“Bond yields dropped, as most were not expecting such dovishness from the central bank, a trader with a private bank said.
Yields were, however, off their lows after RBI Governor Shaktikanta Das clarified that the central bank stood ready to act against inflation if conditions warranted, and the decision to pause was “for this meeting only”, signalling further rate hikes were still possible.
India’s retail inflation rose 6.44% year-on-year in February and has remained above the central bank’s mandated target band of 2% to 6% for 10 out of last 12 readings.
Traders also await the first government debt auction of the current financial year, where it will raise 330 billion rupees ($4.03 billion) through the sale of bonds.
($1 = 81.9650 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee and Varun H K)
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