Indian bonds end soon after the RBI buys the debt

Indian government bonds ended largely unchanged on Wednesday, with the former benchmark paper leading the losses, after the central bank pushed ahead with another batch of illiquid papers for next week’s debt purchases.The benchmark 10-year yield ended at 6.6105% after closing at 6.6137% in the previous session. ‌Bond yields move in the opposite direction to prices.

The Reserve Bank of India is buying bonds. It bought 500 billion rupees ($5.57 billion) worth of bonds earlier this week and will bid for twice that amount through Jan. 22.

Sentiment is still tepid as the central bank has sucked up illiquid papers – debt that is largely untraded – ignoring expectations that the bank would include the former benchmark bonds and other liquid papers in its market operations.

So far this fiscal, the RBI has bought bonds worth a record Rs 4.7 trillion, but the purchases have failed to allay concerns about the glut as state and central governments are set to raise over Rs 8 trillion till the end of March.

State banks preferring government bonds to central banknotes have also ensured that interest rates remain high.

“Going forward, we expect oversupply concerns to persist unless we witness a revival in demand from pensions, insurance and banks,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. Traders are closely watching developments surrounding the possible inclusion of Indian bonds in the Bloomberg Global Aggregate Index. Analysts at Goldman Sachs say the index weighting could be 0.7% and estimate post-draw inflows at about $10 billion to $20 billion.

PRICES

Indian overnight interest rates fell, mainly due to longer-term gains.

The one-year OIS ended 1.5 bps lower at 5.4625%, while the two-year OIS rate fell 2 bps to 5.55%. The five-year OIS interest rate fell by 3.5 basis points to 5.92%. ($1 = 89.8470 Indian Rupees)