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Short bonds shine in India as RBI damps hope of excessive easing

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India's short-duration bonds are regaining their appeal after the nation's central bank dashed hopes for deeper rate cuts going ahead.

[MUMBAI] India's short-duration bonds are regaining their appeal after the nation's central bank dashed hopes for deeper rate cuts going ahead.

Shorter bonds climbed Wednesday after the Reserve Bank of India (RBI) delivered a larger-than-expected cut and promised to keep the banking system flushed with cash. That's as the benchmark longer-tenure note fell after governor Shaktikanta Das said further easing would depend on incoming economic data.

"Shorter bonds are finding favour because it gets the dual benefit of lowering of interest rates and the comfort of liquidity," said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co in Mumbai. "If you look at the yield curve, we find shorter-end to be the most attractive."

The 10-year paper "is going to lose its charm," said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. By delivering a larger-than-expected cut, the RBI used up the space available to it, he said.

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The yield on benchmark 10-year securities rose three basis points to end at 6.37 per cent, climbing 13 basis points from an intraday low reached after the RBI announced a rate cut. The yield on 7.32 per cent notes maturing in 2024 fell seven basis points, while that on 2026 paper declined 10 basis points.

The RBI reduced its main rate by an unconventional 35 basis points to 5.4 per cent, the lowest since 2010. The move surprised most of the 40 economists surveyed by Bloomberg who had predicted a quarter-point cut.

Mr Das told reporters in a post-policy briefing that a 50 basis-point decrease would have been "excessive", a comment that cast doubt about the size of future reductions. Bonds rallied in July, pushing down yields 51 basis points, on bets the RBI will add to three rate cuts this year and guide for further easing.

"There could be an additional 25 basis point cut but that would not be enough to sustain this bond market rally," said Pankaj Pathak, fixed income fund manager at Quantum Asset Management in Mumbai. "The best of the rally is now behind us."

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