Indian Government bond yields declined in early deals on Wednesday, with the 10-year benchmark yield falling to its lowest level in nearly three years, on growing optimism over the domestic central bank easing interest rates this week.

The benchmark 10-year yield was at 6.6928 per cent, as of 10:00 a.m. IST, compared with its previous close of 6.7121 per cent.

The yield fell to 6.6886 per cent earlier in the session, its lowest level since Feb. 21, 2022.

"There is increasing talk about liquidity infusion from the central bank this week, and traders have started anticipating open market bond purchases along with a cut in the cash reserve ratio, if not a reduction in the repo rate," a trader with a private bank said.

Bond yields have been declining since last Friday after data showed that India's economic growth slowed more than expected in the September quarter. The country's gross domestic output fell to a seven-quarter low of 5.4% last quarter.

Along with bond yields, overnight index swap rates - the closest indicator of interest rate expectations - are down by around 20 basis points (bps) after the growth data.

The Reserve Bank of India's (RBI) rate decision is due this Friday and the decline in yields and swap rates signal that the central bank may loosen monetary policy via a lower cash reserve ratio (CRR) for banks.

Market participants have estimated that a cut in the CRR by 50 bps could release over ₹1.1 lakh crore ($13 billion) into the banking system immediately, resulting in a further decline in shorter-duration bond yields.

Traders also said that consistent foreign inflows over the last few sessions is also aiding bullish sentiment.

These investors have bought bonds worth ₹7,700 crore, on a net basis, over the last three days, while foreign lenders purchased bonds worth ₹20,200 crore in the same period, according to Clearing House data. ($1 = 84.6690 Indian rupees) (Reporting by Dharamraj Dhutia Editing by Sonia Cheema)

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