The Reserve Bank of India in its monetary policy yesterday surprised the market by lowering its inflation target for the first half to 4.7 percent to 5.1 percent from earlier estimate of 5.1 to 5.6 percent and that of second half to 4.4 percent from 4.5 to 4.6 percent. This cheered the bond markets and the 10-year benchmark yields fell.
The 10-year bond yields fell to 7.12 percent.
Vivek Rajpal, Rates Strategist, Nomura India is of the view that the yields are likely to fall further and stabilise around the 7 percent mark.
“The bulk of the rally is behind us but they could move down further by 10-15 basis point,” he said.
According to him, there are two parts to the bond yield story. One, is the supply-demand angle and the other is the rate expectation.
The first round of rally was driven by supply-demand and yesterday’s rally was on back of pushing back of rate hike expectations as RBI revised its inflation forecast.
He said, “Market is still pricing in a 50-60 percent chance of a rate hike in next one year but has pushed back its expectation from say one-one and half hikes over next one year to probably now only assigning a 50 percent chance of a hike over the next one year.”
According to him, one is likely to see a further rise in FPI limits for bonds.