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Barclays Capital says the March selloff in Indian government bonds is "overdone." BarCap says RBI will eventually cut interest rates by another 50 basis points by mid-2013, noting it interpreted RBI's policy statement on March 19 as being "balanced", and not the hawkish tone that markets have interpreted.
* "We read the policy statement as balanced, and in an environment of weak growth and softer core inflation, we expect the RBI to eventually lower the repo rate by another 50 bps by mid-2013," BarCap says.
* The recent selloff offers a buying opportunity for 10-year bonds, targeting 7.40 percent in the first half of fiscal 2013/14, with a stop-loss at 8.15 percent, it says.
* BarCap recommends investors switch from 30-year bonds to 10-year bonds, given expectations for a bull-steepening in the yield curve.
* Tips bonds to outperform swaps as although 10-year bonds have sold off by about 15 bps since the FY13-14 budget announcement, 5-year OIS is broadly unchanged and the OIS curve is still pricing in front-loaded rate cuts.
* Recommends buying 10-year bonds versus paying 5-year OIS to position for spread compression with a target at 50 bps and a stop-loss at 75 bps.
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