India bond yields flat, traders await central bank guidance for directional triggers

MUMBAI, Aug 6 (Reuters) - Indian government bond yields were unmoved in early deals on Wednesday ahead of the Reserve Bank of India's monetary policy decision, with market participants betting on a dovish tilt.

The yield on the benchmark 10-year bond was at 6.3311% as of 9:40 a.m. IST, after closing at 6.3321% on Tuesday.

The central bank will announce its decision on 10:00 a.m. IST. A majority of economists expect the authority to keep rates unchanged, according to a Reuters poll.

However, a growing number of market participants have been laying bets on a rate cut, as June retail inflation dropped to a more than six-year low and July inflation is expected to hit a record low.

"We could see a move of around 5 basis points on the benchmark yield on either side as a hawkish policy will see 6.38%, while a dovish tone could lead to test of 6.28% levels," a trader with a state-run bank said.

A dovish commentary and downward revision to economic forecasts by the central bank could drive a fall in government bond yields and overnight index swap rates, even without an actual rate cut, market participants said.

RBI's commentary on liquidity management will be closely watched. Traders expect the RBI to release its new liquidity management framework this week.

In June, the central bank changed its stance to "neutral" while cutting the benchmark rate by 50 basis points.

Nuvama expects the rate-setting committee to keep policy rates unchanged, while retaining the "neutral" stance given the evolving global and domestic macroeconomic backdrop.

RATES

India's overnight index swap rates were little changed as traders waited for policy decision and commentary from RBI officials.

The one-year OIS rate was at 5.44%, and the two-year OIS rate was at 5.40%. The liquid five-year OIS rate was at 5.64%. (Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)

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