MUMBAI (Reuters) - Indian bonds rallied on Friday, sending the benchmark 10-year yield down as much as 6 basis points, after much weaker than expected economic growth data raised hopes the central bank would cut rates at its next meeting in October.
On Friday morning, Indian shares also climbed on rate-cut hopes. The Sensex was up nearly 0.5 percent.
Data late on Thursday showed India's economic growth unexpectedly slid to a three-year low of 5.7 percent in the April-June quarter, as business activity remained disrupted over the country's shock cash squeeze and caution before the launch of a new goods and services tax.
The weak growth is raising hope the Reserve Bank of India (RBI) will cut its main policy repo rate at its next policy meeting in early October, after cutting it by 25 bps last month.
However, much will depend on August consumer price data due on Sept. 12. The latest report showed annual retail inflation had risen 2.36 percent in July from a year earlier, the first pick-up in four months.
But that still is well below the RBI's consumer inflation target of 4 percent.
"I think the case for a rate cut has become even more compelling now," said Mahendra Kumar Jajoo, head of fixed income at Mirae Asset Global Investments in India.
The RBI "had to revise down their inflation forecast and they have to possibly now revise down their GDP forecast," Jajoo added.
The 10-year bond yield was down 4 bps at 6.49 percent as of 0703 GMT Friday, after earlier falling to 6.47 percent. On Thursday, the yield had ended at 6.53 percent.
Still, whether the RBI will be willing to cut rates remains unclear. The RBI has cut its inflation projections for the year, and cut the repo rate by 25 bps last month, but has reiterated it wants to continue to monitor inflation and other economic data to justify further rate cuts.
Subsequent minutes from the Aug. 2 meeting reinforced the caution by most of the six-member monetary policy committee, with some warning that consumer prices could start accelerating later this year.