February 8, 2017 / 11:09 AM / 6 months ago

Indian bonds tumble after RBI leaves rates steady

FILE PHOTO: A cashier displays the new 2000 Indian rupee banknotes inside a bank in Jammu, November 15, 2016.Mukesh Gupta/File photo

(Reuters) - India's benchmark 10-year bond yields rose as much as 26 basis points on Wednesday after the Reserve Bank of India (RBI) left its policy rate unchanged and unexpectedly changed its stance to "neutral" from "accommodative."

The new stance surprised bond investors and raised the prospect the central bank could be done with an easing cycle that had brought down the repo rate by 175 basis points from January 2015 to October last year.

Ahead of the RBI meeting on Wednesday, analysts had expected the central bank would cut the repo rate by 25 bps either this week or at its next review in April.

However, the broader NSE index ended largely flat, after the RBI predicted growth would "recover sharply" in the year starting in April, despite India's radical crackdown on unaccounted cash, or "black money."

"The change in stance from 'accommodative' to 'neutral' suggests to us that we might have actually reached the end of the rate cutting cycle," said Arvind Chari, Head of fixed income and alternatives for Quantum Advisors.

"With the change in stance, we do not expect bond yields to fall and in fact the 25 bps sell off seen today is indicative of the fact that the best times in the bond markets is behind us. Investors would do well to lower their return expectations from bond funds."

Benchmark 10-year bond yields were up 26 bps at 6.69 percent as of 1035 GMT.

The benchmark BSE index, however, extended losses to end 0.2 percent lower at 28,289.92.

Shares had hit four-month highs earlier in the week as markets expected the RBI to cut interest rates on Wednesday.

Auto stocks were the biggest gainers on the NSE index with Tata Motors Ltd and Mahindra & Mahindra Ltd closing 1.2 percent and 1.5 percent higher, respectively.

For mid-day report, see

Editing by Amrutha Gayathri

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