Bond yields traded in narrow band on Tuesday and ended almost unchanged a day ahead of the monetary policy decision. A two-day meeting of the monetary policy committee (MPC) began on Tuesday.
The benchmark 10-year bond yield closed at 6.20 percent compared to the previous close of 6.21 percent. Yields continue to trade below the policy repo rate of 6.25 percent reflecting the expectation of atleast a 25 basis point cut in the benchmark rate.
Wednesday's decision, both on rates and on the quantum of cash reserve ratio (CRR) that banks need to hold, will be key to the future direction of bond yields. 26 out of 33 economists polled by Bloomberg expect the repo rate to be lowered by 25 basis points to 6 percent.
Markets are also awaiting a review of the 100 percent CRR imposed on deposits between September 16 and November 11 and expect the RBI to bring that down in stages.
According to Dhawal Dalal, chief investment officer - fixed income at Edelweiss Mutual Fund, bond yields may see a knee jerk reaction and fall if the RBI cuts rates by a steeper than expected quantum.
However, given the central bank's intention to suck out additional liquidity through the issue of market stabalization scheme bonds and global developments, bond yields may trade in a range thereafter. Bond yields in India have bucked the global trend and fallen while yields across all major economies have risen in anticipation of a rate hike from the US Federal Reserve. Yield have also risen since the election of Donald Trump as US President on expectations that he would introduce fiscal stimulus to spur the US economy, which could lead to higher inflation and larger government borrowings.
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