Indian bond yields drop for third day

Indian federal bond yields dropped for a third straight day on Friday, as weak economic data during the week and signs of some easing in price pressures prompted investors to unwind excessively short positions in the bond market. The benchmark 10-year bond yield closed down 5 basis points on the day at 8.65 percent, taking its fall on the week to 17 basis points. It moved in a wide 8.62 percent to 8.72 percent band during the session.
Total volumes on the central bank's electronic trading platform were at a high 171.80 billion rupees ($3.35 billion) compared with 90-100 billion rupees usually dealt in a day. "Market had turned extremely bearish with concerns over whether or not the debt supplies will go through," said Ashish Parthasarthy, treasurer at HDFC Bank in Mumbai.
"But now that the central bank is doing open market operations (OMOs) regularly and the slowdown story is getting accentuated along with inflation easing, I think this rally can sustain."
India's manufacturing sector expansion slowed in November with the factory output growing at its slowest pace in nearly three years while the infrastructure sector expanded at its slowest pace in more than six years, data this week showed. September-quarter GDP growth slowed to its weakest pace in more than two years, as high inflation, rising interest rates and crisis-hit global capital markets took a toll.
Data on Thursday showed, the food price index rose 8 percent, at its slowest pace in nearly 4 months. Traders said debt buying by foreign institutional investors following the solid demand seen at the auction of the enhanced debt limits also aided bonds, while talk of a cut in the banks' cash reserve ratio (CRR) also boosted.
However, not all traders were convinced of the need for a cut in CRR, or the proportion of deposits that banks' must keep in cash with the Reserve Bank of India (RBI). "Liquidity is not that bad and there doesn't seem to be a need for a CRR cut at this point," the head of fixed-income trading at a private bank said. "Even the advance tax outflows will be returning to the system in a week or two, while we also have the cash management bills maturing immediately post the tax outflows. So I don't see a rationale," he added.
The benchmark five-year swap ended down 10 basis points at 7.15 percent, while the one-year rate closed 6 basis points lower at 7.88 percent. Traders said swap rates fell on hopes of a cut in CRR and expectations Reserve Bank of India (RBI) would begin to ease policy sooner than earlier anticipated after other regional central banks took similar steps earlier this week. RBI injected only 688.25 billion rupees through its repo counter under the liquidity adjustment facility on Friday, sharply down from 828.45 billion rupees on Thursday.