Indian government bonds surged on Wednesday, with the 10-year yield posting its biggest one-day decline in a month, while swap rates fell after the central bank chief said it was "premature" to talk about rate hikes.
Softer oil prices also buoyed sentiment, pulling yields down to the lowest levels in more than three months. Speaking to television channel ET NOW, Reserve Bank of India Governor Sanjay Malhotra said the central bank was watching for second-round effects of higher oil prices on inflation in the broader economy before taking a call on rates.
Malhotra's comments followed a status quo on interest rates earlier this month and minutes that showed most rate panel members were not leaning toward a hike.
The yield on the benchmark 6.94% 2036 bond fell 5.3 basis points to 6.7832%, its biggest decline since May 25. Bond yields move inversely to prices.
"We see no need to anticipate a rate hike at this stage. The RBI will watch incoming data, but if the monsoon remains broadly supportive, even with a deficit of up to 10%, any inflation impact should be temporary and rate hikes are unlikely," said Alok Singh, head of treasury at CSB Bank.
The 10-year yield has now fallen 18 bps since the June 5 policy decision.
The repricing was sharper in overnight index swaps, where traders received fixed rates to unwind rate-hike bets and cut risk.
The one-year OIS rate fell 6.25 bps to 5.78%, while the two-year rate eased 8.25 bps to 5.91%. The five-year rate dropped 8 bps to 6.1750%.
The one-year OIS rate fell more than 10 bps earlier in the session, and is down nearly 30 bps since the latest policy decision.
The one-year rate is now pricing in only two rate hikes this year, a foreign-bank trader said.
Falling oil prices added further support to bond prices, given India's dependence on imported crude. Brent crude futures fell 2% to $75.51 a barrel in Asian trade.
Foreign investors have bought 230 billion rupees ($2.43 billion) of government bonds so far in June, putting them on course for their highest monthly purchase in nearly two years.
"Sentiment has been supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg's global bond indices," DBS said in a note.
