By Dharamraj Dhutia
MUMBAI, May 4 (Reuters) - Indian government bond yields dropped on Thursday, with the benchmark bond yield easing below 7% for the first time in over 13 months after the U.S. Federal Reserve hinted at a pause following a widely-expected rate hike.
The spread between the 10-year benchmark bond yield and the Reserve Bank of India's repo rate has fallen below 50 basis points, the first such instance since September 2017.
The 10-year benchmark 7.26% 2033 bond yield was at 7.0076% as of 10:00 a.m. IST, after closing at 7.0057% in the previous session. Earlier in the day, the yield had dipped to 6.9786%, the lowest since April 8, 2022.
"As expected, benchmark yield breached the key 7% level in opening trade, but now the focus will shift to debt sale and yield should consolidate around the 7% handle until then," a trader with a private bank said.
New Delhi aims to raise 330 billion rupees ($4.04 billion) through a sale of bonds, which includes 140 billion rupees of the benchmark 2033 paper.
U.S. Treasury prices jumped, with yields crashing further after the Fed signalled a pause in its tightening cycle following an expected 25 basis-point(bp) rate hike on Wednesday. The Fed fund rate now stands at 5.00-5.25%.
Fed Chair Jerome Powell said it was now an open question whether further increases will be warranted in an economy still facing high inflation but also showing signs of a slowdown with looming risks of a tough credit crackdown by banks.
"We are closer, or maybe even there," Powell said.
The U.S. rate futures market is now pricing in a pause at the June and July meetings, and a rate cut by September. The market expects cuts between 50 bps and 75 bps by the end of this year.
The 10-year U.S. yield was at 3.33%, while the two-year yield was at 3.80%.
Sentiment also improved after the benchmark Brent crude futures contract slid further to its lowest level in nearly two months. It was at $72.80 per barrel after easing about 9% in the last two sessions.
Easing oil prices bode well for India's inflation outlook as the country is one of the largest importers of the commodity.
($1 = 81.6700 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)