The rally in government bond yields continued at the start of the week, with the yield on the 10-year benchmark bond trading at 8.15% compared with previous close of 8.17% on hopes of a fall in interest rates in the coming months.
Yields are seen correcting if the Reserve Bank of India (RBI) does not cut the repo rate on December 2. However, the correction would be temporary because the broad expectation shall remain that rates will start falling in 2015.
Retail inflation for the month of October dropped to 5.52%, down from 6.46% the previous month. RBI has set a retail inflation target of 8% by January 2015 and 6% by early 2016. RBI will review the monetary policy on December 2.
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Bond traders believe that by the end of this week the yield on the 10-year bond may drop close to 8.10%.
Experts believe RBI will acknowledge that retail inflation has been cooling down and accordingly make dovish statements in the monetary policy review next week. RBI has kept the repo rate unchanged at 8% since the January monetary policy review.