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REFILE-UPDATE 2-India bonds hit over 4-month high on dovish cbank
June 3, 2014 / 7:18 AM / 3 years ago

REFILE-UPDATE 2-India bonds hit over 4-month high on dovish cbank

(Refiles to fix formatting)
    * 10-year bond yield falls as much as 15 bps from day's high
    * 10-year yield ends down 6 bps on day at 8.60 pct
    * Yields rise on SLR cut but retreat on dovish policy tone
    * Some market participants expect rate cut in H2FY15

    By Swati Bhat
    MUMBAI, June 3 (Reuters) - Indian government bonds rallied
to more than four-month highs on Tuesday after the central bank
toned down its rhetoric on inflation and hinted it would not
raise interest rates further as long as inflationary pressures
continued to ease.
    The more dovish tone offset the initial negative impact from
a cut in the banks' statutory liquidity ratio, or the amount of
bonds lenders must park with the Reserve Bank of India, by 50
basis points to 22.50 percent.
    The cut in the SLR and the new tone were seen by markets as
moves that would be welcomed by the new pro-business government
as it seeks to revive economic growth, with the RBI also keeping
interest rates on hold as widely expected. 
    The benchmark 10-year bond yield ended down 6
basis points at 8.60 percent. It dropped as much as 15 basis
points from the session high to the day's low of 8.58 percent,
its lowest level since Jan. 21.
    "The cut in SLR won't matter in the short term as much. We
have held the view that under (RBI Governor) Rajan's tenure we
should see SLR going towards the 20 percent mark," said Arvind
Chari, head of fixed income and alternatives at Quantum
Advisors.
    "We are pleasantly surprised with RBI's stance on policy
easing if inflation falls faster than anticipated. I think
market should take it as a very strong message and hence unless
there are some external oil price or food shocks, we should see
bond yields headed lower," he added.
    Some dealers also said the possibility of a rate cut in the
second half of the year has risen following the latest statement
with the government likely to play an active role in containing
supply-side inflation.
    Rate-cut expectations were also reflected in the overnight
indexed swaps with the benchmark five-year swap rate
 and the one-year rate both ending
down 14 basis points each at 7.94 percent and 8.25 percent
respectively.

 (Editing by Subhranshu Sahu and Anupama Dwivedi)

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