MUMBAI: Indian federal bond yields rose on Monday as sentiment was broadly hit after the central bank said the scope for future rate cuts was limited, with the Reserve Bank of India's bond purchase plan this week failing to provide cheer.
The 25 basis point rate cut on Friday failed to enthuse markets as it was broadly discounted, while the central bank's view that there is limited scope for more rate cuts has kept the debt market in sell mode.
After market hours on Friday, the central bank announced bond purchases of 100 billion rupees on Tuesday, which was largely expected as the RBI had desisted from announcing a cash reserve ratio cut to replenish a still-high liquidity deficit.
Traders, however, said more open market operations (OMO) and the likely announcement of a new benchmark 10-year bond will attract buying interest in bonds.
Out of the scheduled 3.49 trillion rupees of gross borrowing between April and September, the month of May will see 600 billion rupees of supply.
"Auction of the new benchmark security, which is seen coming this month, along with more OMO interventions, is likely to revive buying interest in bonds in the near term," said Shakti Satapathy, a fixed income analyst at AK Capital.
The benchmark 10-year yield edged up 1 basis point to 7.75 percent.
Reserve Bank of India Governor Duvvuri Subbarao said on Monday the central bank's OMOs were not the preferred tool to inject liquidity, but all options will be used to actively manage the cash situation.
Liquidity remained tight, with banks' borrowing from the central bank's repo window at 976.3 billion rupees.
The total volume on the central bank's electronic trading platform was at 383.55 billion rupees.
A recent rebound in global crude oil is keeping the market jittery as it may limit more room for easing rates to revive economic expansion.
The RBI warned on Friday that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy.
The one-year overnight interest swap (OIS) was up 4 basis points at 7.24 percent, retracing from a near 28-month low. The five-year swap rate rose 5 basis points to 6.94 percent, rebounding from a nine-month low.
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