Bond yields may open down tracking fall in U.S. peers; RBI policy watched

By Dharamraj Lalit Dhutia

MUMBAI, Sept 29 (Reuters) - Indian government bond yields are expected to open lower on Thursday, tracking a sharp decline in U.S. yields, although sentiment is expected to remain cautious ahead of the Reserve Bank of India's policy decision that is due on Friday.

The benchmark Indian 10-year government bond yield IN072632G=CC is seen in a 7.24%-7.29% band, a trader with a private bank said. The yield ended at 7.3340% on Wednesday.

"U.S. yields have sharply corrected within a day, after seeing nearly 10 basis points rise daily since the last few days, and this should result in a gap-down opening for local bond yields," the trader said.

"Still, after some reaction at open, yields may be range-bound ahead of (the) all-important monetary policy decision."

U.S. yields nosedived after the Bank of England said it will buy long-dated U.K. bonds to restore financial stability in markets rocked globally by the new British government's fiscal policy plans.

The 10-year U.S. yield US10YT=RR eased as much as 32 basis points on Wednesday, after hitting 4.02% earlier in the day for the first time since April 2010. The bond was last trading at 3.75% yield.

Meanwhile, all eyes would be on the RBI's policy outcome, with many market participants expecting the central bank to raise interest rate by 50 basis points for a third consecutive time on Friday.

The RBI has already raised rates by 140 basis points between May and August to tackle inflation that has stayed above its tolerance level for eight straight months through August.

Meanwhile, traders also await the Indian government's borrowing calendar for October-March. Analysts expect the market to absorb the bond supplies for the rest of this fiscal year, although at higher yields.

The government is scheduled to borrow a gross 5.86 trillion Indian rupees ($71.98 billion) in October-March, which could increase by another 160 billion rupees after New Delhi failed to raise the planned amount from the sale of floating rate securities earlier. KEY INDICATORS: ** Brent crude futures LCOc1 0.1% higher at $89.40 per barrel, after rising 3.5% in previous session ** 10-year U.S. Treasury yield at 3.7512%, two-year note at 4.1411% ($1 = 81.4060 Indian rupees)
Reporting by Dharamraj Lalit Dhutia; Editing by Neha Arora

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