India bonds inch up as traders await Fed meet

MUMBAI: Indian government bonds inched up on Wednesday ahead of US Federal Reserve’s policy decision, while subdued trading activity confined bonds to a narrow band.

The yield on the benchmark 10-year note was at 6.5207%, as of 10:30 a.m. IST.

It closed at 6.5357% on Tuesday.

Bond yields rise when prices fall. Traders are keenly awaiting the Fed’s policy outcome, due after Indian market hours, and Chair Jerome Powell’s address to gauge the probability of further rate cuts.

Market participants have priced in a 25-basis-point cut and see a 91% likelihood of a December rate cut, according to CME FedWatch Tool.

A US-China trade deal and lack of economic indicators amid a US government shutdown can still put the rate-easing track in jeopardy, traders said.

Daily average trading volumes have also nosedived in the last five sessions, dropping 55% to 349 billion rupees from 770 billion rupees in the preceding five days, CCIL data showed.

“The market is lacking strong catalysts, which is creating a supply-demand mismatch,” a trader at a private bank said.

Also holding bonds in tight rope is a liquidity crunch in the domestic banking system, traders said.

The daily average liquidity has swung between surplus and deficit over the last few days. Net liquidity injected was at a 80-billion rupee deficit, as of Tuesday.

The Reserve Bank of India is due to conduct another overnight variable rate repo auction worth 1.50 trillion rupees ($17.01 billion) later in the day to shore up liquidity.

The RBI is also set to sell treasury bills worth 190 billion rupees, and the cut-off yields will be key to gauge demand.