Bond yields rise when prices fall.
Traders covered short positions after strong demand for government debt helped restore confidence in the market.
Investors also suspected that the heavy buying in the final hour of the session could likely be a central bank purchase.
Indian states earlier in the day issued bonds with maturities of four to 30 years worth 313.5 billion rupees ($3.50 billion), well above the previously planned debt sale of 210 billion rupees.Traders had feared the supply was too much for the market with a shortage of buyers to absorb, but states eventually raised 297.25 billion rupees.
Bond market sentiment had deteriorated over the past few sessions as traders scaled back their rate easing bets after India’s gross domestic product grew. by 8.2% in the July-September quarter – the fastest pace in 18 months.
A disparity between strong economic growth and record low retail inflation has cast doubt on a rate cut when the Reserve Bank of India announces its policy decision on December 5.
“There is still room for the RBI to cut rates in December, and that expectation was likely the driving force behind today’s rally,” said Alok Sharma, head of finance at ICBC.
“The increase in yields appears limited and there should be a 5 to 10 basis point rally from here.”
PRICES
Indian overnight index swap (OIS) yields fell from flat to lower on Tuesday even as bond yields fell, with traders staying close to the RBI policy outcome.
The one-year OIS fell 1 bp to 5.48%, while the two-year swap remained stable at 5.5025%. The five-year interest rate slowly fell to 5.7975%. ($1 = 89.6340 Indian Rupees)
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