The India's 10-year bonds gained on Wednesday after the RBI announced that they would allow foreign investors to buy up to Rs. 27,500 crore ($4.14 billion) in additional sovereign debt next month as part of its plan to gradually raise debt investment limits.
Meanwhile, The 10-year bond yield was down 2 bps at 7.49 pct at 0339 GMT, after earlier easing to a more than one-week low of 7.48 per cent. The bonds prices also rallied on following dovish comments made by the Federal Reserve chair Janet Yellen calling for caution in raising US interest rates.
Moreover, the Fed Chair Yellen at the Economic Club of New York said that caution in raising rates is especially warranted and the Fed has considerable scope for stimulus if needed and the central bank could deploy forward guidance and QE if needed. In terms of the outlook for rates, Yellen reiterated that the FOMC expects gradual rate increases in the coming years but noted that the future rate path is necessarily uncertain.
The fall in Indian bond yields is likely to accelerate as market is expecting a 25bps cut in the next policy meeting on next Tuesday. Furthermore, pressure on the central bank is mounting for a rate cut, especially after the government stuck to the budget deficit target of 3.5% of GDP for FY17.
This is consistent with the assessment that recent Indian economic data have improved a bit -CPI inflation moderated to 5.2% y/y in February from 5.7% y/y in January. However, given that service sector inflation remains high, it will be important to assess the tone of the monetary policy statement, as we believe that there are upside risks to the RBI's FY17 inflation target of 5%.
We foresee that the RBI will primarily focus on the domestic liquidity situation. In the recent week, systemic liquidity has tightened considerably due to the government holding back on spending and maintaining large cash balances with the RBI.
The material has been provided by InstaForex Company – www.instaforex.com