MUMBAI: India's benchmark 10-year bond yield ended flat on Monday after earlier falling to its lowest since early August as bets the central bank would move to cut key interest rates were offset by caution ahead of the government's borrowing plan announcements.
The slew of government reforms this month, including raising diesel prices, is expected to give Reserve Bank of India more room to lower interest rates by its next review in October after opting to lower only the cash reserve ratio last week.
However, traders are also turning more cautious this week as the government is due to announce its amount of borrowing for the second half of the fiscal year ending in March.
"Market feels the reforms announced and the government's commitment to implement further reforms will trigger RBI easing," said Harish Agarwal, a dealer with First Rand Bank.
The 10-year bond yield closed steady at 8.16 percent, after falling to 8.15 percent during the day, its lowest since Aug. 10.
Total volume on the central bank's electronic trading platform was at a moderate 229.05 billion rupees ($4.3 billion).
The 10-year bond yield is expected to hold in a narrow 8.12-8.18 percent range until the borrowing calendar is announced, traders said. No date For the announcement has been set, but is expected towards the end of the week.
India is widely expected to breach its fiscal deficit target of 5.1 percent for fiscal 2012/13, although analysts say India may choose to hold off on announcing any changes in borrowing from the target announced in March until it has a better grip of its actual needs.
Further gains in bond prices could also be capped as a rally that saw bond yields fall 8 bps so far in September is looking as having running its course.
However, there was a potential further downside to the overnight indexed swap rates on the back of rate cut hopes, traders said.
The benchmark 5-year OIS rates fell 3 bps at 7.12 percent, after falling to 7.11 percent, its lowest since Aug. 30.
The 1-year rate fell 2 bps to 7.68 percent, after hitting 7.67 percent, its lowest since Aug. 7.
Liquidity however, was not too impacted even after the cut in the cash reserve ratio released 170 billion Indian rupees ($3.18 billion) into the banking system on Saturday given repo borrowings from the central bank window rose to 801.3 billion rupees on Monday at the start of a new reporting cycle.
Traders said they expect repo borrowings to start falling from Tuesday and eventually may hit a 100-150 billion deficit by the first week of October. ($1 = 53.50 Indian Rupees)
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