(Reuters) - Indian government bond yields declined on Thursday, with the benchmark yield ending at its lowest level in eleven weeks, after Federal Reserve Chair Jerome Powell struck a more dovish tone than the market expected on interest rates.
The benchmark 10-year yield ended at 7.2095%, its lowest since Sept. 15, after ending at 7.2798% on Wednesday. The yield also posted its biggest single-session fall, in terms of basis points, since Oct. 4.
"Market sentiment is now bullish, with expectations that the next rate hike (in India) would be the last one, and hence there is constant demand for bonds, leading to a fall in yields, said Ajay Manglunia, managing director and head of investment grade group at JM Financial.
Fed Chair Powell said the U.S. central bank could ease the pace of interest rate hikes "as soon as December" but warned that the fight against inflation was far from over.
U.S. Treasury prices rose after the comments, with the yield on the 10-year note declining to 3.60%, its lowest in nearly two months.
The Fed funds futures have raised the chances of a 50-basis points (bps) hike at the next policy meeting to 91%, from 83% just before Powell's comments. The Fed has raised rates by 375 bps so far in 2022 to the 3.75%-4.00% range.
A relatively less hawkish Fed could also release the pressure from the Reserve Bank of India to hike rates. The RBI's Monetary Policy Committee (MPC) next meets on Dec. 7. It has raised the repo rate by 190 bps since May, to 5.90%.
J.P. Morgan expects the RBI to hike rates by 35 bps in December, which would be the last in the cycle, resulting in a terminal rate of 6.25%, even as retail inflation is expected to be sticky and average 6.5% till March.
"The MPC is likely to look through this and believe that, with monetary policy operating with long and variable lags, slowing growth momentum in the coming quarters will eventually have a salutary impact on price pressures."
India's economy grew 6.3% in the July-September quarter, less than half the 13.5% growth in the previous three months, and growth for the full year is likely to be in the 6.8%-7% band, the government's chief economic advisor, V. Anantha Nageswaran, said.