India's Bond Yields Near Three-Year Low On Likely Liquidity Boost

The yield on India's benchmark 10-year bond is on track to hit a three-year low in hopes of a liquidity boost via a quasi-rate cut in the upcoming monetary policy meet outcome, as economic woes deepen.

The yield on the 10-year bond opened flat after closing at 6.68% in the previous session. The yields have been on a decline throughout the year, and are nearing the nearly three-year low of 6.66%, previously seen in February 2022.

Since the latest GDP data was announced, the yields on the short-term two-year paper slipped by 2 basis points to 6.6%, while the long-term security fell by 5 basis points to 6.81 on Thursday.

Bond yields usually move in the direction of the policy rate as more liquidity makes bonds more attractive to investors.  

The Reserve Bank of India's monetary policy committee will meet from Wednesday to Friday to decide on the key policy rates after the country's economic growth fell to the slowest in nearly two years.

Of the 25 economists polled by Bloomberg, 21 expect the MPC to maintain status quo for the eleventh straight meeting. The benchmark lending rate, or the repo rate, is expected to remain unchanged at 6.5%.

Elevated inflation makes a December rate cut unlikely, but there could be an explicit acknowledgement that growth needs support, too, stated a research note by Citi. "This would cement our February rate cut view."

However, the RBI could consider a CRR cut in December, as a step toward easing, while also loosening recent pressure on banking system liquidity, the note said.

The country's economic growth grew at the slowest pace in nearly two years, adding pressure to the central bank policy meeting due later this week. The gross domestic product grew 5.4% in the July-September quarter, compared to 6.7% in the April-June quarter.

India's retail inflation rose to a 14-month high at 6.21% in October breaching the central bank's target, driven by price rises in vegetables, fruits and oils and fats.

Meanwhile, global funds reduced their holdings of so-called Fully Accessible Route, or FAR bonds, by Rs 77.3 billion ($910 million) near the November end, according to Clearing Corp. of India.