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Bond yields down 5 basis points on rate hike delay, inflation woes and weak factory output

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The RBI on Monday cancelled its forthcoming weekly auction for the second straight week on the back of comfortable cash balances and improved sentiments

Bond yields down 5 basis points on rate hike delay, inflation woes and weak  factory output

The government 10-year bond yield fell nearly 5 basis points on Tuesday as, according to analysts, rate hike by the Reserve Bank of India might be delayed in the face of weak factory data and higher inflation. This was the seventh consecutive sessions when the bond yields fell.

The RBI on Monday cancelled its forthcoming weekly auction for the second straight week on the back of comfortable cash balances and improved sentiments.

The 10-year bond yield dropped 5 bps to hit a low of 6.62 percent from its previous close of 6.667. Bond yields and prices move in opposite direction.

"The combination of weakening growth, in line with inflation and Omicron fears may potentially delay the monetary policy normalisation in India," Motilal Oswal said in a note to investors. Since the central bank kept the key policy rates unchanged after the bi-monthly Monetary Policy Committee review earlier this month, a decision on raising the reverse repo rate now looks postponed to the next meeting scheduled in April.

The November index of industrial production data released recently grew only 1.4 percent on-year. This was half-way to analysts' estimate of 2.8 percent.  Retail inflation, although, picked up to 5.6 percent year-on-year for January, stayed lower than the analysts' consensus of 5.8 percent.

According to Barclays India, within target inflation means accommodative monetary policies could run for a slightly longer horizon. While the RBI may choose to normalise the policy corridor over the next six months, we expect repo rate hikes to only begin from Q3 2022, with risks of furtehr delays. "We still expect policy rate hikes of 50 basis points , which should push the repo rate to 4.5 percent by the end of 2022," Barlays report said.

Yields were under pressure since the beginning of the year due to expected policy tightening by global central banks and continued rising crude oil. After the Union Budget 2022, bond yields surged sharply due to a record borrowing programme announced and a higher-than-expected fiscal deficit target.

Rupee was trading at Rs 75.48 a dollar, up 0.16% from its previous close on Tuesday.

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