India bonds seen steady, rate cut bets to be key driver

By Dharamraj Dhutia

MUMBAI, July 21 (Reuters) - Indian government bond yields are expected to start the week range-bound as traders continue to look out for major triggers, with eyes on the development of bets on further monetary policy easing from the central bank.

The yield on the benchmark 10-year bond is likely to trade between 6.30% and 6.32%, a trader at a private bank said, after closing at 6.3058% on Friday. The five-year 6.75% 2029 bond ended at 5.9665%.

"From now until the monetary policy decision, we do not have any major data points, and hence reaction, if any, would be driven by the change in expectations for a rate cut in August," the trader said.

The Reserve Bank of India's policy decision is due on August 6, and comes after the central bank slashed key interest rate by 50 basis points in June and changed its stance to neutral from accommodative.

India's retail inflation slipped to 2.10% in June, the slowest pace in more than six years, down from 2.82% in May.

An estimated drop in inflation to a record low in July is prompting calls for at least one more rate cut this year, with some saying the chances of a rate cut in August cannot be ruled out.

"The recent inflation surprise and the comfortable inflation trajectory going ahead have made the August policy live for a rate cut," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Focus would also remain on the RBI's liquidity management after the central bank withdrew 2 trillion rupees ($23.22 billion) through a seven-day variable rate reverse repo on Friday. RATES India's overnight index swap rates (OIS) are also expected to be range-bound amid a lack of strong cues on interest rates.

The one-year OIS rate ended at 5.4950% and the two-year OIS rate at 5.47%. The liquid five-year finished at 5.70%. KEY INDICATORS: ** Benchmark Brent crude futures 0.1% higher at $69.35 per barrel after easing 0.4% in the previous session ** Ten-year U.S. Treasury yield at 4.4310%; two-year yield at 3.8750% ** India to buy short-term bonds and sell long-term bonds worth up to 320 billion rupees ($1 = 86.1300 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)

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