Mumbai: Indian government bonds were little changed on Thursday, as traders braced for Friday’s debt sale, after which the focus will shift to the central bank’s interest rate and liquidity path.
The benchmark 10-year yield settled at 6.5324%, versus 6.5323% on Wednesday, staying within this week’s narrow 6.52%-6.55% band.
The yield briefly broke above 6.55% three times but retreated on strong buying interest.
New Delhi’s 300-billion-rupee debt sale on Friday, which includes 5- and 50-year bonds, is seen as a key test of long-end demand, traders said.
Yields on 30-to-50-year bonds have fallen for three straight sessions on speculation that India’s fully accessible route (FAR) government bonds could be added to the Bloomberg Global Aggregate Index following reports by local media outlet Business Standard.
Traders are now looking for clearer signals on the RBI’s easing path, with a convergence between one- and two-year OIS rates pointing to expectations of a single rate cut followed by a long pause.
The RBI’s rate-setting committee will meet in early December to announce its policy decision.
The central bank lowered the repo rate by 100 basis points to 5.5% between February and June, and maintained a status quo in the following two policies.
Benign inflation creating room for rate cuts, RBI open market operations (OMOs) as durable liquidity fades, and further clarity on the U.S.–India trade deal are seen as key tailwinds for the bond market, Kotak Mahindra Bank wrote in a note.
India’s durable banking system liquidity has also dropped to its lowest level in over five months, crimped by the RBI’s aggressive FX operations.
Net durable liquidity fell to 3.29 trillion rupees in the fortnight ended Oct. 31, the lowest since mid-May.
RATES
India’s overnight index swap (OIS) rates rose as traders saw opportunity to pay on dips.
The one-year OIS ended nearly 1 bp higher at 5.46% and the two-year rose 1.25 bps to 5.4625%, and the liquid five-year jumped about 3 bps to end at 5.76%.
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