(Updates closing level, details)
* 10-year yield ends 2 bps higher at 7.74 pct
* RBI cuts repo rate by 25 bps, as expected
* RBI lowers banks' amount of bonds held till maturity to 23
pct from 25 pct of deposits
* Economists see scope of another 25 bps cut in repo rate
By Subhadip Sircar
MUMBAI, May 3 Indian federal bond yields rose on
Friday after the central bank warned it had limited room for
further monetary easing while delivering a 25 basis point cut in
the key lending rate in line with expectations.
The Reserve Bank of India also reduced the amount of bonds
that banks can hold till maturity while leaving the cash reserve
ratio unchanged, disappointing bankers.
The benchmark 10-year yield climbed as much
as 4 basis points to 7.81 percent immediately after the
However, yields retreated later on hopes the central bank
will conduct open market operations to infuse liquidity.
RBI Governor Duvvuri Subbarao said OMOs were "as good as" a
cash reserve ratio cut, "if not better", to manage liquidity.
The 10-year yield closed at 7.74 percent, up 2 basis points.
For the week, it ended flat after five consecutive weeks of
After trading hours, the RBI said it would buy back up to
100 billion rupees of bonds on Tuesday.
Yields rose early trading on Friday after a central bank
report, released late Thursday, said that the scope for further
rate cuts was limited.
The rupee and shares also extended losses after the RBI
A recent fall in global commodity prices, particularly crude
oil and gold, had spurred hopes that the central bank may have
more room for easing to revive economic expansion.
However, the RBI warned that the risk of inflationary
pressure persists despite a recent sharp decline in wholesale
price index (WPI) inflation, and said a high current
account deficit poses the biggest risk "by far" to the Indian
The RBI said it expects the economy to expand 5.7 percent in
the current fiscal year, lower than government forecasts.
Most economists now expect a 25 basis points cut in the rest
of the calendar year with a fewer number calling a 50 basis
"Cautious RBI commentary today in addition to yesterday's
macroeconomic report which highlighted 'very limited room' to
ease rates has overshadowed relief from the 25 bps rate cut,"
said Radhika Rao, economist at DBS.
"As expected, the CRR was left unchanged, as policymakers
seem convinced that bond buybacks and lowering of the government
cash balances will be sufficient to thaw liquidity conditions
and improve transmission."
The RBI also lowered the amount of bonds that banks can
hold till maturity (HTM) as part of their government bond
holding by 200 basis points to 23 percent. The reduction would
be in a phased manner by way of at least 50 basis points each
quarter beginning June, it said.
"Most banks are prepared for HTM. They have been
progressively reducing HTM over the last few months," said
Suyash Choudhary, head fixed income at IDFC Mutual Fund.
Swap rates were largely unaffected by the RBI move. The
five-year swap rate rose 1 bp to 6.89 percent,
while the near-end swap ended flat at 7.20
(Additional reporting by Archana Narayanan; Editing by Sanjeev
Miglani and Subhranshu Sahu)