MUMBAI: Indian government bond yields came off lows to end flat on Monday as a continued cash shortage in the banking system weighed, with dealers waiting to see whether the central bank buys debt through OMOs this week to ease liquidity.
The market is also betting that Finance Minister Palaniappan Chidambaram will keep the government's fiscal deficit at 4.8 percent in the fiscal year starting in April, enabling him to keep a lid on the government's market borrowing.
Analysts broadly expect the government to present a 2013/14 budget on Thursday that keeps net borrowing below 5 trillion rupees ($92.45 billion), with various estimates ranging from 4.2-4.9 trillion rupees.
"The cash situation is not improving at all. That needs to be addressed to bring the deficit closer or below 1 trillion rupees. A couple of OMOs, each of 100-120 billion rupees, should do the trick," said Killol Pandya, head of fixed income at Daiwa Mutual Fund in Mumbai.
The benchmark 10-year bond yield ended unchanged at 7.80 percent after earlier easing to 7.78 percent. Total volume on the central bank's electronic trading platform was at a moderate 326.30 billion rupees.
Repo borrowings have hovered over 1 trillion rupees for most of the month even after a central bank cash reserve ratio cut came into effect on Feb. 9 and the bank bought bonds of nearly 100 billion rupees.
The federal budget will be the next likely trigger for bonds, with investors not only looking for fiscal discipline but a credible plan to achieve that.
Daiwa's Pandya said the assumptions behind the revenue projections and the areas where the government will curtail expenditure will be closely watched.
Interest rate swaps remained largely range-bound. Traders expect the March central bank policy to act as the next trigger.
"Borrowing numbers will have little impact on swaps, not more than 2-3 bps, that too on the 5-year. In fact, that is the reason why swaps are better to be long on, going into the budget," said a strategist with a primary dealer.
The five-year OIS rate edged 1 bp higher to 7.23 percent, and the one-year rate closed 2 bps up at 7.63 percent.
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