MUMBAI: Indian government bonds rallied on Friday after a policy interest rate cut and liquidity infusion measures, even as the 10-year benchmark note ended flat on profit taking and supply.
The Reserve Bank of India cut its key repo rate by 25 basis points and left the door open for further easing as it took steps to boost banking-sector liquidity by up to $16 billion to support a “goldilocks” economy.
The RBI also decided to conduct open market operations of 1 trillion rupees ($11.14 billion) to buy bonds this month, and another $5 billion in forex swaps to add liquidity to the banking system and speed up transmission of lower rates.
As a result, the 10-year yield settled at 6.5166% against 6.5267% in the previous session.
“To support growth, RBI acted proactively to provide liquidity in December itself…with this approach, we expect more OMO announcements and FX swaps going forward,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.
“Overall, this is a dovish and market-supportive policy action, expected to drive yields lower.”
India’s RBI to buy 4- to-25-year bonds in open market purchases on Thursday
The policy released pent-up demand for longer-term debt, with yields on bonds of maturities of 30 years and more declining as much as 8 basis points.
Yields move inversely to prices.
Separately, New Delhi sold 320 billion rupees of 6.48% 2035 paper at a slightly lower than expected price. This paper will soon replace the existing benchmark note.
The bond settled at 6.4944%, compared with its previous close of 6.5132%.
RATES
India’s overnight index swap rates eased after the policy outcome jolted a market that had priced out odds of a rate cut.
The one-year OIS fell 5 bps to 5.43% and the two-year swap was down by 4 bps at 5.4750%. The five-year OIS rate settled at 5.7950%, lower by 2.5 bps.
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