"There should be profit booking at current levels, as all the positive outcomes are fully factored in, and hence the level of sub-7% will not sustain," said VRC Reddy, treasury head of Karur Vysya Bank. Even as market participants have started expecting rate cuts from the Fed as early as next quarter, the domestic market does not see the Reserve Bank of India (RBI) cutting rates at least till December. "The entire game is hinging on rate cuts and when they will start, and the curve is already pricing in, but actual action is still some time away," said Naveen Singh, head of trading at ICICI Securities Primary Dealership. In a surprising move last month, the RBI maintained status quo on rates and easing inflation has raised bets that the RBI will maintain a prolonged pause.
The 10-year yield has eased nearly 35 basis points since the financial year started, amid aggressive pricing of rate cuts by the Fed.
"The 7.10%-7.20% zone may be appropriate levels taking into the account heavy supply calendar for the year. For the yield to sustain below 7%, there should be rate cuts from the RBI," Karur Vysya Bank's Reddy added.
The cut-off yields for an auction of benchmark paper earlier in the day were higher-than-expected already "indicating fatigue at current levels," a trader added.
"If only traders are taking the stock at 7%, and investors and state-run banks are not much active, then the rally would reverse," ICICI Securities Primary Dealership's Singh added.
Meanwhile, treasury officials at state-run banks, the
largest holders of government bonds have said, they would wait
for a correction to enter afresh, after selling over 342 billion
rupees of bonds since April.
(Reporting by Dharamraj Dhutia; Editing by Nivedita
Bhattacharjee)
