MUTUAL FUNDS

Safe Haven Demand Has Led Yields on Major Treasury Bonds to Ease To Near Record Lows <
11-Jun-12   12:35 Hrs IST

Mr. Santosh Kamath
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Indian benchmark treasury yields eased on hopes the central bank will cut rates at its mid-quarter policy review scheduled later this month.

Signs of a slowing global economy along with intensification of the Euro area are likely to result in a concerted policy action by central banks across the world. Over the last month, safe haven demand has led yields on major treasury bonds to ease to near record lows and the fall in commodity prices is seen easing inflationary pressures. However, there are still concerns over the ongoing de-leveraging and the governments' ability to cut burgeoning deficits.

The environment in Indian bond markets is quite contrasting - while yields have edged lower in recent days, they still remain elevated. It is a challenging period for RBI as growth has moderated, but inflation levels remain elevated and sticky. Domestic factors apart, the ongoing weakness in the rupee is also seen partially offsetting gains that can possibly accrue from the continued decline in global oil / commodity prices. Nonetheless, given the sharp decline in global energy prices in recent weeks (Brent below $100/bbl), subdued core inflation and the government talking about some expenditure cuts, there could be more room for the central bank to resort to further monetary easing.

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