NEW DELHI • Indian sovereign bonds rallied the most since early July as data showing an unexpected slowdown in economic growth boosted speculation that the central bank will cut benchmark interest rates further.

Gross domestic product grew 5.7 per cent in the April-June quarter from a year earlier, an official report showed last Thursday. That was below the 6.5 per cent median estimate in a Bloomberg survey of 45 economists and the 6.1 per cent growth in the previous quarter.

Bank of America Merrill Lynch said in a note that the weak growth data supported its call for a 25-basis point cut at the Reserve Bank of India's Dec 6 meeting.

The yield on government notes due May 2027 fell four basis points on Friday to 6.48 per cent, its biggest drop since July 10. It climbed six basis points last month, the most for benchmark 10-year debt since April, as a steeper-than-expected rebound in inflation reduced bets of more easing. The RBI lowered the repurchase rate by 25 basis points on Aug 2.

"Rate-cut hopes, which had almost disappeared from the market, have been rekindled after the GDP data," said Mr Vijay Sharma, executive vice-president for fixed income at PNB Gilts. "It is proving to be good for the bond market."

India's US$2.3 trillion (S$3.1 trillion) economy slowed as companies and retailers pared inventories before the roll out of a nationwide sales tax, adding to the strain caused by Prime Minister Narendra Modi's cash ban.

Economic weakness should lead the market - which expects flat rates until year-end and is pricing in only 40 per cent chance of a 25-basis point rate cut by end-2018 - to "at least price in fully a rate cut from the RBI," London-based head of emerging-markets research at TD Securities Cristian Maggio wrote in a report.

BLOOMBERG