Indian federal bond yields rose after trading in a narrow band amid thin volumes as lingering worries over likely additional government borrowing this month and a possible rate increase to tame high inflation number at the central bank review weighed.
Expectations of a 25 basis point rate increase and an accompanying hawkish statement at the mid-quarter monetary policy on September 16 intensified as data on Thursday showed food inflation accelerated to a near six-month high of 10.05 in the year to August 20.
"Market is wary of additional borrowing concerns in September and then the weekly inflation numbers are also high which could mean that the monthly inflation could be above 9.5 percent," said Manish Wadhawan, director and head of rates trading at HSBC India.
The more widely tracked wholesale price index inflation in July stood at 9.22 percent, well above the central bank's end-march 2012 projection of 7 percent and comfort zone of 4.5-5.0 percent. A government official told Reuters last week the federal government would take a call on extra borrowing in September after looking at the previous month's tax collection and spending.
The 10-year benchmark bond yield ended up 2 basis points (bps) at 8.34 percent after moving in a band of 8.31-8.35 percent. Total volume traded was a modest 73.70 billion rupees ($1.6 billion) compared with 100 billion rupees usually traded in a day.
The benchmark five-year overnight indexed swap rate ended down 3 bps at 6.98 percent while the one-year rate ended up 1 bp at 7.85 percent. However, a survey of manufacturers in Asia's third-largest economy showed a slower growth in new manufacturing orders in August, which combined with concerns over global economic recovery arrested a large rise in yields in the day.
India's factory sector expanded at its slowest pace in more than two years in August as export orders shrank amid weakening global demand, a survey of manufacturers in Asia's third-largest economy showed. Besides, the Reserve Bank of India's decision to not accept the entire amount of the auction amount and offer some to primary dealers calmed sentiment as it indicated that the bank was not comfortable with high yields.
"The devolvement means that the RBI was not willing to accept much higher yields compared with estimates. It is not really a yield signal for the market to read," said a dealer at a foreign bank. The RBI raised 110 billion rupees via sale of three bonds, of which it devolved one. The RBI sold 22.71 billion rupees of 7.99 percent, 2017 bond at 8.3931 percent and devolved 7.25 billion rupees on primary dealers.
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