Indian bond yields rise ahead of auction; policy reforms eyed

Thu Jul 19, 2012 5:34pm IST

* Bond investors waiting for policy reform from the government

* RBI likely to lower rates by 50 bps in Oct-Dec-Reuters poll

* India to sell 150 bln rupees in bonds on Friday

By Subhadip Sircar

MUMBAI, July 19 (Reuters) - Indian federal bond yields rose slightly on Thursday ahead of a debt auction at the end of the week, though hopes for policy reforms after presidential elections and improving liquidity are keeping debt prices supported.

Bond investors are hoping the government will announce substantial policy reforms after elections for the ceremonial role of president concluded on Thursday.

Policy reforms, including hiking diesel prices to cut the government's subsidy burden or opening sectors such as retail to foreign investment, are seen as critical for India to meet its fiscal deficit target of 5.1 percent for the fiscal year.

The Reserve Bank of India, although widely expected to keep interest rates on hold at its July 31 policy review, has been urging the government to lower the subsidy bill to enable better monetary policy transmission.

Dealers "will prefer to play the market by buying into any sell-offs, as the expectation is that liquidity will remain relatively easy and that RBI will cut rates at some stage," said Agam Gupta, head of foreign exchange, rates and credit trading at Standard Chartered Bank in Mumbai.

The 10-year benchmark bond yield rose 2 basis points to 8.09 percent from its previous close.

Gupta expects the benchmark 10-year yield to trade between 8.00-8.15 percent in the run-up to the monetary review.

In the near-term, traders are eyeing India's sale of 150 billion rupees in government bonds on Friday, which will provide the latest snapshot on investor demand.

Bond markets have recently been comforted after borrowings by banks in the repo window has averaged around 500 billion rupees in the last 12 trading sessions, well within the central bank's comfort zone.

Investors also do expect further interest rate cuts later this year, though most economists expect the current repo rate of 8.00 percent to be cut to 7.50 percent only between October and December.

Data this week showed headline inflation slowed to its level in five month in June, still not enough to comfort the RBI, especially as lower-than-expected rainfalls in the monsoon season threaten to raise food prices.

However, government action to improve its finances would help offset some of the RBI's inflationary concerns, according to analysts, by helping relieve the central bank from carrying alone the burden of bolstering sagging growth.

The 5-year rate ended 7 basis points higher at 6.95 percent, steadily gaining after hitting on Monday a 2012 low of 6. 88 p ercent.

The 1-year rate closed up 4 basis points at 7.65 percent, after hitting 7.66 percent during the session, its highest level in more than a week. (Editing by Rafael Nam)

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