Mumbai: India's stocks rallied, while bond yields fell to the lowest in a month on Friday on expectations the Reserve Bank of India (RBI) will have scope to cut its key lending rate later this month after the US Federal Reserve kept its interest rates unchanged.
The Fed on Thursday cited worries about the global economy as a key factor compelling it to keep its monetary policy unchanged for now, but left open the possibility of a modest policy tightening later this year.
Traders had feared a rate hike on September 17 would have sparked volatility in emerging markets and kept the RBI from cutting the repo rate for a fourth time this year at its policy review on September 29.
The benchmark 10-year bond fell 4 basis points to 7.71 percent, its lowest since Aug. 20.
The Nifty was up 1.56 percent, breaching the 8,000-point level for the first time since Aug. 31. The Sensex gained 1.31 percent.
"Based on domestic developments, there is a sufficient case for rates to be lowered," wrote Radhika Rao, an economist at DBS in an email to clients.
Data showing consumer inflation easing to a record low of 3.66 percent in August had already raised expectations the RBI would cut the lending rate by a quarter percentage point this month.
Such a cut would bring the repo rate to to its lowest since May 2011, and traders hope it will help boost an economy widely seen as growing below its potential.
Data earlier this month showed gross domestic product expanding at a slower-than-expected annual rate of 7 percent in the April-June quarter.
Overnight index swaps were trading at more one-week lows, with one-year OIS falling 4 bps to 7.25 percent, and the five-year OIS losing 6 bps to 6.91 percent.
Meanwhile, the rupee was at a three-week high of 66.0600/0650 per dollar, and traders said they expected the RBI to intervene if conditions turned volatile.
"They (RBI) may not let the rupee appreciate too fast, too quickly," said Ashtosh Raina, head of foreign exchange trading, HDFC Bank, in Mumbai.
"There may be intervention on the downside also."
