Gilt yields fell for the ninth consecutive trading session on Thursday on expectations of a repo rate cut and easing inflation. The street is expecting the Reserve Bank of India (RBI) to cut the repo rate by at least 25 basis points in the third-quarter review of the monetary policy on January 29. The repo rate is currently at 8%.
The yield on the 10-year benchmark gilt 8.15% 2022 ended at 7.97% on Thursday compared with previous close of 7.99%. This is the third consecutive trading session when the yield on the 10-year benchmark gilt ended below the 8% mark. A month ago the yield was at 8.17%.
"The rally in the gilts market is because of hopes of a repo rate cut expected later this month. Besides that the RBI shifted a gilts auction scheduled this week and said it will conduct open market operations (OMO) purchase auction of gilts up to Rs 8,000 crore on Friday," said Prasanna Patankar, senior vice president at STCI Primary Dealer.
The easing liquidity is also helping gilt yields to fall. Bank borrowed Rs 94,860 crore on Thursday under the RBI's Liquidity Adjustment Facility (LAF) compared with a borrowing of Rs 97,360 crore on Wednesday.
The street expects the RBI to cut the repo rate by at least 25 basis points later this month. The December Wholesale Price Index (WPI) data is expected later this month. According to Patankar if the December inflation is somewhere close to 7.25%, then a 50 basis points cut in the repo rate is also possible. The WPI rose 7.24% from a year earlier in November compared with October's 7.45%.
S Srinivasaraghavan, executive vice president and head-treasury of Dhanlaxmi Bank, said: "If the RBI cuts the repo rate by 25 basis points on January 29, then the yield on the 10-year benchmark gilt will drop to 7.85% while if there is a 50 basis points cut in the repo rate, the yield may drop 7.75%."
The street is also hoping that before the monetary policy review, the yields on the 8.15% 2022 gilt may drop to 7.90% in anticipation of a rate cut.