MUMBAI: Indian federal bond yields hit a nine-month low on Wednesday after the Reserve Bank of India said it would buy up to 100 billion rupees ($2.02 billion) of debt in tandem with the government's bond auctions on Friday.
At 10:07 a.m. (0438 GMT), the 10-year benchmark bond yield was at 8.14 percent after touching a low of 8.10 percent, a level last seen on April 28, 2011, according to Thomson Reuters data. The yield was at 8.27 percent at the close on Tuesday.
The one-year swap rate fell to 8.11 percent from 8.15 percent on Tuesday, while the benchmark five-year swap rate eased to 7.25 percent from 7.29 percent.
Trading volume in bonds was 82.15 billion rupees, higher than the usual 30 billion to 40 billion rupees at this stage of the session, data from the Clearing Corp of India showed.
The selection of debt to be bought by the RBI in its open market operation (OMO) was also welcomed by traders.
"Up till now, the RBI had avoided selecting on-the-run securities for OMO," said Vivek Rajpal, India rate strategist at Nomura. "But the inclusion of the 12-year benchmark (9.15 percent, 2024 bonds) this time opens the possiblity of more such on-run securities in the OMO, which is even more bullish for the market than mere debt purchases from RBI."
On-the-run securities are those that are actively traded.
The RBI has bought about 719 billion rupees of bonds via OMOs since late November in a bid to offset the supply glut created by the government's massive borrowing plan for 2011/12.
The central bank said on Tuesday it would buy 8.24 percent 2018 bonds, 8.20 percent 2022 bonds, 9.15 percent 2024 bonds and 8.28 percent 2032 bonds, using a multiple-price method.
Rajpal said he expected the 10-year bond to hit 8 percent by end of March.
RBI Deputy Governor Subir Gokarn indicated on Tuesday that more debt buys were likely as a way to deal with cash shortages in between monetary policy reviews.
The option to further reduce the cash reserve ratio (CRR) for banks was always on the table, he said.
The RBI cut the CRR by 50 basis points to 5.5 percent last week, infusing about 320 billion rupees into the banking system.
The government will sell 70 billion rupees of 8.79 percent 2021 bonds, 30 billion rupees of 7.83 percent 2018 bonds and 30 billion rupees of 8.83 percent 2041 bonds this week.
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