MUMBAI (Reuters) - India's shares were flat, while bonds gained slightly despite data showing weaker-than-expected economic growth, with investors still betting the economy will improve.
This reaction followed data out late on Wednesday showing India was no longer the world's fastest-growing major economy after posting gross domestic product (GDP) growth of 6.1 percent in January-March from a year earlier, well below expectations for 7.1 percent and China's 6.9 percent annual expansion in the first quarter.
Analysts expect the Reserve Bank of India (RBI) to hold its policy repo rate at 6.25 percent on June 7 and issue a less hawkish statement than at its last meeting.
The change in tone is expected given recent data showing consumer inflation easing to 2.99 percent in April - well below its target of 4 percent - though markets are still braced for a potential surprise.
Meanwhile, economic growth in the last quarter was seen likely to have been hit by the government ban on high-denomination banknotes imposed in November.
The economy is, however, still expected to post stronger economic growth going forward, a view that spurred Indian shares to record highs last month.
"Markets expects the next quarter to be very good," said Vinod Nair, Head of Research at Geojit Financial Services.
"It will be a big surprise if RBI cuts rates now," he added. "RBI will take some more time as they are also concerned about inflation and how much further the note-ban impact will continue."
India's benchmark BSE Sensex was up 0.01 percent at 0623 GMT, but the broader NSE Nifty was down 0.04 percent, with both still near record highs hit on Wednesday.
Meanwhile, the yield on the newly issued 10-year bond was down 2 basis points to 6.64 percent from its previous close, while the benchmark five-year overnight indexed swap was down 4 basis points to 6.51 percent.
The Indian rupee was at 64.45 to the dollar compared with its 64.50 close.
Investors will likey stay cautious ahead of the RBI meeting, without adding significant positions given that outcomes of the RBI's policy meetings since it adopted a six-member monetary policy committee format in October have surprised investors.
"Markets would like to believe that the RBI will soften its tone and hint at a rate cut in its August policy meeting," said a senior treasury dealer at a foreign bank.
"But given that markets have been proven wrong the last three times, no one is confident to go the whole hog and buy especially with just one week to go for the monetary policy meeting."
(Reporting by Suvashree Dey Choudhury and Krishna V Kurup; Editing by Eric Meijer)