Rate cuts in India boost bond recovery, but 10-year yields end flat

Indian government bonds rose on Friday after a policy rate cut and liquidity injection measures, even as the 10-year benchmark ended flat on profit-taking and supply.The Reserve Bank of India cut its key repo rate by 25 basis points, leaving the door open for further easing. She took steps to increase liquidity in the banking sector by up to $16 billion, supporting a “Goldilocks” economy.

The RBI also decided to conduct open market operations of 1 trillion rupees ($11.14 billion) this month to buy bonds and another $5 billion in currency swaps to add liquidity to the banking system and speed up the transmission of lower interest rates.
As a result, the ten-year yield settled at 6.5166%, compared to 6.5267% in the previous session.

“To support growth, RBI acted proactively in December itself to provide liquidity… with this approach, we expect more OMO announcements and FX swaps in the future,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.

“Overall, this is a dovish and market-supportive policy action, which is expected to push yields lower.”

The policy released pent-up demand for longer-term debt, with yields on bonds with maturities of 30 years and more falling by as much as 8 basis points. Yields move in the opposite direction to prices.In addition, New Delhi sold 320 billion rupees of 6.48% paper in 2035 at a slightly lower than expected price. This document will soon replace the existing benchmark note.

The bond settled at 6.4944%, compared to the previous closing price of 6.5132%.

PRICES

Indian overnight interest rates fell after the policy outcome shocked a market that had priced in the chances of a rate cut.

The one-year OIS fell 5 bps to 5.43% and the two-year swap fell 4 bps to 5.4750%. The five-year OIS rate stood at 5.7950%, a decrease of 2.5 basis points. ($1 = 89.9740 Indian Rupees)