Indian bonds rally as outgoing Governor Rajan says policy remains accommodative

The Indian government bonds rallied Tuesday after the Reserve Bank of India Governor Raghuram Rajan said that monetary policy remains accommodative and will continue to emphasize the adequate provision of liquidity.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell 5 basis point to 7.121 percent, the yield on super-long 30-year bond also dipped 6 basis points to 7.306 percent and the short-term 2-year note yield slid 1-1/2 basis points to 6.835 percent by 07:10 GMT.

The Reserve Bank of India Governor Raghuram Rajan delivered no surprises in its last monetary policy meeting while keeping the key policy rate unchanged at 6.50 percent. He had cut repo rate by 25 basis points in April.

Also, the central bank kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities (NDTL) and continued to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.

The monetary policy statement was hawkish with the central bank expressing concern over the recent pickup in CPI inflation. The RBI also cited upside risks to its 5 percent inflation target for FY17, due to firming international commodity prices, particularly oil and the implementation of the seventh pay commission recommendations.

Meanwhile, the Sensex fell 0.62 percent or 174.67 points to 28,007.90 and Nifty-50 futures trading 0.57 percent lower or 48.25 points at 8,679.75 by 07:40 GMT.