MUMBAI: Indian government bonds slipped on Wednesday as sentiment turned bitter after data undermined speculation that the central bank was buying in the secondary market ahead of the policy verdict and as rupee slid past the 90 level to a record low.
The benchmark 10-year yield settled at 6.5369%, compared with the close of 6.5155% on Tuesday.
It had dropped six basis points on Tuesday, helped by late-session demand that many dealers initially attributed to the Reserve Bank of India purchasing to support the market.
However, the “others” category – which consists of RBI and other participants – net bought bonds worth only 1.17 billion rupees ($12.97 million) on Tuesday. Yields move inversely to prices.
A tumbling rupee also weighed on bonds, as it slid past 90 per U.S. dollar to a record low on Wednesday, with a lack of U.S.-India trade deal and portfolio flows likely to keep Asia’s worst performer under pressure.
All eyes are now glued to the RBI’s policy decision on Friday. India’s stronger-than-expected GDP growth, at a time when retail inflation is at a record low, has shaken the bond market’s view on where interest rates are headed.
The divergence has set up the prospect of sharp moves when the central bank delivers its decision on Friday. Traders now see a broader set of possible outcomes.
MUFG said it expects one cut in February, bringing the repo rate to 5.25%, from its previously forecasted cuts in December and February.
Traders are also betting on RBI’s measures for liquidity injection, following the central bank’s sale of 91-day T-bills earlier in the day at levels last seen over three years ago.
RATES
India’s longer-tenor overnight index swap (OIS) rates climbed in tandem with government bond yields as traders scaled back rate cut expectations.
The one-year OIS ended at 5.48% and the two-year swap closed about 2 bps higher at 5.52%. The five-year OIS rate was up 2 basis points at 5.8150% – its highest close since April 2.
American Dollar Exchange Rate