Indian bonds gain as Rajan takes over as RBI Governor

Indian government bond yields dropped for a fourth session in five on Wednesday as a recovery in the rupee from close to record lows and the swearing-in of a new central bank governor raised hopes for some market-friendly measures.

Raghuram Rajan, a former chief economist at the International Monetary Fund, took charge at the Reserve Bank of India as the country faces its worst economic crunch since a balance of payments crisis two decades ago.

Traders have cited hopes Rajan may take a fresh approach to the RBI's risky strategy to raise short-term interest rates and drain cash under outgoing governor Duvvuri Subbarao.

"The hope that the central bank will roll back the cash tightening measures has always been there.

“It may take some time but probably should happen before September-end," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management.

Traders largely expect the status quo to remain at least until the US Federal Reserve's monetary policy meeting on September 19

is out of the way.

The benchmark 10-year bond yield eased 19 basis points on the day to close at 8.39 percent, although volumes in the market continued to remain low.

Bonds gained as the rupee staged a sharp recovery from near record lows after suspected heavy central bank intervention.

Traders also cited lingering hopes for bond purchases through open market operation by the central bank.

The RBI has bought Rs 124.62 billion worth of bonds since its announcement on Aug. 20 that it would occasionally buy bonds to relieve some of the cash tightness in the banking system.

The benchmark bond is expected to hold in a range of 8.20 per cent to 8.80 per cent until the US jobs data on Friday, according to dealers.

In the overnight indexed swap market, the benchmark five-year rate closed down 7 basis points at 8.53 per cent, while the one-year rate ended down 14 basis points at 8.48 per cent.