Indian bonds stable; lukewarm mood on RBI’s bond purchase choices

Indian government bonds stabilized early on Tuesday, pausing after a sharp sell-off in earlier sessions following the central bank’s decision to exclude the most liquid benchmark paper from this week’s bond purchases. The benchmark 10-year yield stood at 6.5668%, at 10:30 am IST. The price ended Monday at 6.5697%, an increase of more than five basis points. The yield on the 6.48% 2035 note rose slightly to 6.5384%.

Bond yields rise when prices fall.

The Reserve Bank of India will buy bonds worth 500 billion rupees ($5.55 billion), including bonds with maturities of four to 25 years, but not the most liquid 10-year benchmark.

“The withdrawal of the 10-year bond would have supported trading activity… everyone who bet on the withdrawal cut their positions,” said a trader at a private bank.

There is also a growing belief among some market participants that the RBI’s rate easing cycle is largely over, traders said.

Last week, the RBI cut the key repo rate by 25 basis points and left the door open for further easing, while announcing steps to boost liquidity in the banking sector. “We view the easing cycle as effectively completed and the scope for additional cuts limited unless growth surprises on the downside,” Goldman Sachs analysts said.

A sharp rise in the five-year overnight index swap reflects this change in sentiment, as it rose 12 basis points in the previous session – the biggest single-day gain since May 8 – amid aggressive position cuts by offshore investors.

Attention is also focused on the US Federal Reserve’s monetary policy decision, expected late on Wednesday.

PRICES

Indian overnight index swap rates have calmed after a sell-off, driven mainly by offshore investor inflows.

The one-year OIS held steady at 5.4575% and the two-year swap rose about 1.25 basis points to 5.5650%. The five-year OIS rate was stable at 5.9%. ($1 = 90.1180 Indian rupees).