January 10, 2013 / 11:49 AM / 5 years ago

Indian bonds hit 27-month high; industrial data awaited

* 10-yr bond yld ends at 7.88 pct vs 7.90 pct on Wed
    * Higher repo borrowing raises hope for more open mkt ops
    * 10-yr seen dropping to 7.85 pct on Friday-trader

    By Swati Bhat
    MUMBAI, Jan 10 (Reuters) - India's benchmark 10-year bond
yield dropped to a 27-month low on Thursday as investors
continued buy debt on expectations the central bank will cut key
interest rates later this month to support the faltering
economy.
    The 10-year paper has risen in 13 of the last 14 trading
sessions as market participants have been betting on at least a
25-basis-points rate reduction on Jan. 29.
    The 10-year yield hit a low of 7.86 percent during the
session, its lowest since Sept. 29, 2010.
    Traders are now awaiting factory output data on Friday and
inflation data on Monday to help cement policy bets.
    The benchmark 10-year bond yield closed at
7.88 percent, down 2 bps from Wednesday. The yield is down a net
27 bps since the beginning of the current rally 14 sessions ago.
Total volume stands at a high 509.95 billion rupees.
    A survey of 25 economists predicted that the index of
industrial production rose just 0.7 percent year-on-year in
November following an 8.2 percent rise in October as as
factories closed for holidays a month later than in 2011.
 
    Inflation is likely to have reversed direction and edged up
an annual 7.4 percent in December on higher food costs, another
Reuters poll showed. 
    "Higher repo borrowing has raised hopes for more open market
operations. Tomorrow's IIP is now key but overall sentiment for
bonds remains positive on the back of supportive comments from
the government," said Harish Agarwal, a fixed income dealer with
First Rand Bank.
    "I think the 10-year bond may go to 7.85 percent levels
soon," he added.
    Banks' repo borrowing rose above 1 trillion rupees ($18.48
billion) for the first time in seven sessions. 
    The government hiked railway passenger fares after a gap of
nine years on Wednesday, and later in the day government sources
said there was a proposal to increase heavily subsidised fuel
prices to rein in a swollen fiscal deficit. 
    Traders said the proposal, if implemented, would be positive
for bonds in the medium- to longer-term though it may push up
inflation in the near-term.
    India's 1-year OIS rate closed steady at 7.55
percent while the benchmark 5-year rate edged 2
bps higher to 7.18 percent.

 (Editing by Sunil Nair)

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