MUMBAI: Indian federal bond yields were lower on Tuesday amid optimism that the Reserve Bank of India will announce a bond purchase offer this week to provide some relief to the renewed squeeze in liquidity conditions.
The central bank paused last week after a series of bond purchases via open market operations to offset the impact on rupee liquidity from its suspected intervention in currency markets.
The repo borrowing has rebounded to near one trillion rupee levels after four sessions of improvement.
"Heavy bets are placed on an OMO announcement for this week as cash strain has increased," said Anoop Verma, a dealer with Development Credit Bank.
"The 8.79 percent and 9.15 percent are the preferred candidates for OMO so buying was seen in those bonds," Verma said.
RBI has conducted 591.01 billion rupees ($10.63 billion) of OMOs since start of the current fiscal to ensure an adequate supply of liquidity in the banking system and support the heavy supply.
The most traded 9.15 percent 2024 bond fell 4 basis points to 8.41 percent and the old 10-year bond fell 2 basis points to 8.36 percent during the session.
The benchmark 10-year bond yield ended up 1 basis point at 8.18 percent as supply pressure was keeping interest in new paper low.
India will sell 150 billion rupees of debt on July 6.
RBI has conducted 2 auctions of 70 billion rupees each in the 8.15 percent paper, while the outstanding in the 8.79 percent stands at 830 billion rupees.
The market is now keenly watching the special auction conducted by the Securities and Exchange Board of India (SEBI) on Wednesday to sell the recently increased bond holding limits to foreign institutional investors.
The capital market regulator will auction the additional $5 billion limit of government bonds with a residual maturity of at least three years and the 313.87 billion rupees of corporate bond long-term infrastructure limits, which need to be held for one year and have a residual maturity of at least 15 months.
The auctions for these limits will be conducted on the Bombay Stock Exchange platform from 1000 GMT to 1200 GMT.
"Given the tenor restrictions and existing re-investment rules, combined with high hedging costs, we expect only modest demand from foreign investors," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.
Dealers said demand at the auction may be hit as the auction has been scheduled on a US holiday.
One-year OIS rate unchanged at 7.81 percent and the five-year rate fell 1 bps to 7.22 percent. ($1 = 55.5950 Indian rupees)
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