MUMBAI (Dow Jones)--Indian government bonds extended early gains Monday after a central bank survey cut its economic growth forecast for the current fiscal year through March 2010.
The benchmark 6.90% 2019 bond ended higher at INR96.49 from INR96.21 Friday.
The Reserve Bank of India's survey Of professional forecasters lowered its economic growth estimate to 6.0% for this fiscal year, from 6.5% in an earlier survey, reflecting the impact of poor monsoon rains this year.
Traders said the survey, which highlighted both the risks to a still nascent economic recovery and the rising threat of inflation, may give the Reserve Bank space to hold rates at its policy review meeting Tuesday.
"The RBI may have talked up bond yields too far. As long as credit growth stays sluggish, the RBI may not want to risk growth by tightening liquidity prematurely," said the fixed income head of a private bank.
However, he added that the central bank may choose to raise the statutory liquidity ratio--the portion of deposits that banks must hold in bonds--to help cut the massive liquidity overhang as well as help the government's borrowing program.
A Dow Jones Newswires poll of 13 economists expect the RBI to hold both its key rates steady Tuesday. It is also expected to keep banks' cash reserve ratio unchanged at 5%.
"While premature reversal of the monetary policy stance entails risk of stifling recovery, persistence of accommodative stance could adversely impact inflation expectations," the Reserve Bank Of India said in its report on macroeconomic and monetary developments for the second quarter.
A hold on rates could prompt a sentimental rally in bond markets, with the 10-year benchmark targeting a yield of 7.25% over the next few sessions, another trader said.
In the currency market, the Indian rupee lost ground against the U.S. dollar on month-end importer demand for the greenback.
The dollar ended at INR46.65, down from INR46.51 Friday.
"It's been pretty range-bound with no major currency cues coming in, and (local) stocks pretty much flat. The month-end importer demand propped up the dollar through the day, but there was no major interest either way," said a dealer with a foreign bank.
The Bombay Stock Exchange's 30-stock Sensitive Index fell 70.31 points, or 0.4%, to finish at 16,740.50.
Source : The Wall Street Journal