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The rally in government bonds may continue on Monday on expectations of a rate cut in the Reserve Bank of India's (RBI) monetary policy review on Tuesday.
The Street is anticipating a 25-basis point cut in the repo rate. The rupee may find support because if there is a rate cut, foreign investors may start putting in money in domestic markets, which will help the rupee.
"The probability of a rate cut is quite high. If a rate cut happens, then lots of FIIs may be interested in buying equities," said Ashutosh Khajuria, president (treasury), Federal Bank.
The yield on the 10-year benchmark bond ended at 7.82 per cent on Friday, compared with the previous close of 7.85 per cent. The new 10-year bond yield on the other hand ended at 7.64 per cent compared with previous close of 7.65 per cent.
"The new 10-year paper is already there in the market. A couple of more issuances will come up in the new paper and then the new paper will emerge as the new 10-year benchmark bond," said Khajuria. According to bond traders the 10-year benchmark bond yield is seen falling by few more basis points this week and if the guidance of the monetary policy is dovish then the fall in yields may be more.
The rupee had ended at 63.83 on Friday, against the previous close of 63.81 to a dollar. According to currency traders, this week the bias is towards appreciation of the rupee and the broad trading range is seen between 63.50 to 64 to a dollar. "Month-end dollar demand from importers is not there and if there is a rate cut, FII flows will pick up, supporting the rupee," said the head of treasury of a large state-run bank.
