Indian bond yield falls to 33-month low as rate cut seen

Last Updated: Tue, Apr 23, 2013 12:00 hrs

* 10-year bond yield ends 2 bps lower at 7.73 pct

* Overseas investors seen buying federal debt ahead of policy

* 10-yr bonds to breach 7.70 pct on rate cut, dovish stance by RBI - Nomura

By Archana Narayanan

MUMBAI, April 23 (Reuters) - Indian bond yields fell to a 33-month low on Tuesday as foreigners are expected to increase purchases after lapping up limits at an auction to sell government debt quotas ahead of a widely expected rate cut on May 3.

Cooling commodity prices are seen giving the central bank room to cut policy rates, triggering a rally in bonds that have seen yields drop 17 basis points in the last seven sessions.

Barclays said in a note it expects a pick-up in foreign demand for government debt in the run-up to the Reserve Bank of India's May policy review. The bond quota once received has to be utilised within 30 days.

A government debt auction on Monday drew bids for $6.4 billion, about a third more than on offer, indicating a robust appetite.

The RBI is likely to cut interest rates in May for a third time this year, drawing comfort from a fall in inflation, a Reuters poll showed.

Falling oil and gold prices, besides easing inflation and languishing growth, are seen helping ease India's current account deficit concerns and providing more elbow-room to the central bank to lower policy rates.

The economy has reached bottom and growth is likely to pick up now, C. Rangarajan, chief economic adviser to Prime Minister Manmohan Singh, said on Tuesday.

"Bonds will consolidate ahead of monetary policy from here on. I see very limited sell-off in bonds ahead of policy," said Vivek Rajpal, rates strategist at Nomura in Mumbai.

The 10-year yield ended at 7.73 percent, a level last seen on July 28, 2010. It had ended at 7.75 percent on Monday.

Rajpal expects the 10-year bond to breach 7.70 percent if the RBI cuts interest rates and appears dovish.

Indian financial markets are closed on Wednesday for a local holiday.

The absence of debt sale by the government for the rest of the month will support bonds, said dealers.

The near-term improvement in current account deficit has prompted Goldman Sachs to expect the RBI to cut its repo rate by 50 bps by mid-2013, versus its previous forecast of an equivalent cut only in the March quarter of 2014.

The one-year overnight interest swap (OIS) fell to 7.21 percent during the session, the lowest since Jan. 10, 2011. It closed at 7.22 percent compared with 7.25 percent on Monday.

The benchmark five-year swap rate closed down 5 bps at 6.94 percent, a level last seen on Oct. 4, 2012. (Editing by Subhranshu Sahu)

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