* Bond investors waiting for policy reform from the
* RBI likely to lower rates by 50 bps in Oct-Dec-Reuters
* India to sell 150 bln rupees in bonds on Friday
By Subhadip Sircar
MUMBAI, July 19 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
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
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)