Indian bond yields ease; RBI says 'very limited' room to ease policy

Last Updated: Thu, May 02, 2013 19:33 hrs

* 10-year bond yield drops 1 bp to 7.72 pct

* Cut in withholding tax on debt to boost inflows

* Near-end swaps fall to 28-month lows

By Subhadip Sircar

MUMBAI, May 2 (Reuters) - Indian bond yields came off 33-month lows to end marginally lower in volatile trading on Thursday ahead of the central bank's annual monetary policy on Friday, where it is widely expected to cut rates for a third time this year.

Bond dealers broadly expect a 25 basis point cut in the repo rate, but a section of the market expects a bigger 50 basis point cut or a lowering of banks' cash reserve ratio.

Dealers are also closely watching whether the central bank keeps the elbow room for more rate cuts in its guidance.

However, the central bank said in a report there was "very limited" space to ease monetary policy further in 2013/14.

Yields dropped to 7.68 percent intraday after the fall in crude oil prices seemed sustainable on ample supplies and fresh signals of weak global economic growth.

New Delhi's move to cut withholding tax on government and corporate debt, which is expected to boost inflows into debt, has helped ease yields in the last two sessions.

JPMorgan estimates the tax cut to result in up to $5.2 billion inflows into government bonds, mainly due to the limits which have been acquired but not utilised by foreign investors.

"It does signal that the FM is now taking steps to improve the foreign investability of the Indian bond market. This could ultimately improve the flexibility and funding of INR's external deficit, and expose the government bond market more fully to foreign demand," the investment bank said in a note.

The benchmark 10-year bond yield dropped 1 basis point (bp) to 7.72 percent.

Total volumes on the central bank's dealing platform stood at an above average 562.75 billion rupees.

Financial markets were closed on Wednesday for a holiday.

"A 25 basis point cut is largely priced in. If the RBI issues a dovish statement, yields may fall towards 7.60 percent. All indicators are pointing towards a softer policy," said Debendra Dash, a fixed income dealer with Development Credit Bank.

Yields fell 22 bps in April, the biggest fall in 11 months, largely on hopes of more central bank easing on falling commodity prices.

The government will resume its borrowing programme with a 150 billion rupee debt sale on Friday.

The near-end swap fell to a 28-month low of 7.17 percent, before closing flat at 7.20 percent.

The five-year swap rate ended at 6.88 percent, down 2 bps from its last close. It had fallen to 6.86 percent during the session, a level last seen on July 24. (Editing by Subhranshu Sahu)

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