RBI liquidity measures may pressure India bonds; rupee rally to limit losses

MUMBAI: Indian government bonds could open the week under mild selling pressure after the central bank announced measures to absorb banking-system liquidity, although expectations of a sharp rupee rally may help limit losses.

The benchmark 6.94% 2036 bond yield may trade in a 7.26%-7.32% band, a trader with a primary dealership said, after ending at 7.2994% on Friday.

Bond yields rise when prices fall.

Over the weekend, the Reserve Bank of India (RBI) unveiled fresh measures to shore up the rupee, redirecting oil companies’ dollar purchases away from the spot market and tightening hedging rules as the currency hovers near record lows.

“We could have seen yet another test of over 7.30% levels on the 10-year benchmark, but the rupee measures will provide an overall calm to Indian assets,” the trader said.

The RBI announced it will sell debt worth 250 billion rupees ($2.58 billion) on Tuesday, and tightened norms of daily reserve maintenance for banks from October 16.

The moves come just days after the central bank raised its policy rate and tweaked its stance to calibrated tightening, hinting at more hikes in coming months.

It also raised its inflation forecast by 20 bps to 5.2%, while core inflation, which excludes volatile food and fuel prices, was seen at 4.4% from 4.3% earlier.

India’s September retail inflation print is due later in the day, with a Reuters poll showing the print to rise 5.4% year-on-year.

Meanwhile, the benchmark Brent crude price remains close to $105 per barrel mark.

Elevated energy prices could impact oil-import-dependent India’s inflation trajectory and government finances.