"The measures to absorb excess liquidity, first the

temporary CRR hike, and later, the increase in the MSS ceiling, helped to stabilise bond yields," the report said.

With the Monetary Policy Committee (MPC) of the RBI, not only refraining from cutting rates in two consecutive policies, but also changing the policy stance from accommodative to neutral, the 10-year g-sec yield has reverted to the level seen before the note ban.

Srinivasan said despite the hawkish stance of the policy document, the MPC members' verbal comments emphasised that the policy stance is flexible.

This suggests that one last rate cut of 25 basis points to bring the repo rate to 6 per cent should not be ruled out, given the stance that real interest rates may need to be around 125-175 basis points, although the likelihood of further easing appears low, he said.

"A rate cut would dampen bond yields, as well as foreign institutional investors (FII s) interest in Indian debt, particularly in the light of the expected rate hikes by the US Federal Reserve," he said.

The rating agency said banks interest in investing in bonds is expected to remain high, given subdued demand from the private sector for bank credit, in light of sluggish capital spending and less attractive bank lending rates.

"While we expect bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to g-sec," he said.

(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)