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Yields snap 4-quarter rise to dip in 2Q, RBI policy meets view

FILE PHOTO: A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad

By Dharamraj Lalit Dhutia

MUMBAI (Reuters) - Indian government bonds posted their first quarterly drop in yields in July-September, after rising in the previous four quarters, even as the Reserve Bank of India hiked policy rates largely along expected lines.

The benchmark Indian government bond yield ended at 7.3984%, after closing at 7.3405% on Thursday. The yield fell five basis points in the current quarter, after rising by an aggregate of 140 basis points in the last four quarters.

"The policy decision was already on expected lines, and as we are moving towards the end of rate hike cycle, bond yields may be close to their near-term peak," said Raju Sharma, head of fixed income at IDBI Mutual Fund.

The Reserve Bank of India raised benchmark repo rate by 50 basis points on Friday, the fourth straight increase in the current cycle, and the second such in this quarter, as policymakers extended their battle to tame stubbornly above-target retail inflation rate.

The RBI has now raised interest rates by a total 190 basis points since its first unscheduled mid-meeting hike in May, but inflation remains sticky – a phenomenon that is affecting much of the global economy.

Bond market was buoyant this quarter on bets of progress towards Indian notes being included in global indexes. The talks got a leg-up after multiple foreign brokerages predicted an announcement as early as October.

The development led to a spurt in government bond buying by foreign banks and investors for most part of the quarter.

However, Reuters reported earlier in the week, citing sources, that Indian bonds will be considered to be included in JPMorgan's influential emerging market debt index only next year due to a number of issues New Delhi needs to address.

Sentiment was also sparked by India's move to cut its gross borrowing by 100 billion rupees to 14.21 trillion Indian rupees ($174.66 billion). The federal government now aims to borrow 5.92 trillion rupees during October-March, including 160 billion rupees of green bonds.

($1 = 81.3600 Indian rupees)

(Reporting by Dharamraj Lalit Dhutia; Editing by)