MUMBAI: Indian government bond yields edged down for a third straight session on Monday as cash conditions did not tighten as much as feared, following recent measures by the central bank to defend the weak rupee by draining cash.
Still, sentiment remained cautious ahead of the Reserve Bank of India's monetary policy review on Tuesday.
Although the RBI is widely expected to keep the repo rate and the cash reserve ratio on hold on Tuesday, investors are hoping for clues about how long it will keep its cash-draining measures or indications on further steps in the works.
After the close of Monday, the RBI said it will continue to manage money market liquidity in order to balance financial stability, growth and inflation.
"No change in rates is expected tomorrow but some signal on their stance could be provided, although it is very difficult for them to draw a timeline for the same," said Arvind Chari, a fixed income fund manager with Quantum Asset Management.
The benchmark 10-year bond yield closed down 3 basis points at 8.13 percent. The yield moved in a range of 8.10 percent to 8.21 percent during the session.
Total volumes on the central bank's electronic trading platform were at a low 134.55 billion rupees compared with the usual 300 billion-400 billion rupees on an active trading day.
The Reserve Bank of India announced on July 15 measures to drain cash such as raising short-term interest rates and curtailing the amount of funds lenders can borrow from the central bank. The central bank followed it up by tightening liquidity further last week.
The combined measures force investors, who were borrowing in short-term interbank markets to fund speculative trades, to resort to the marginal standing facility (MSF), an emergency funding window for lenders.
The MSF was hiked by 2 percentage points to 10.25 percent, and as a result the call money rate, or India's key overnight interbank funding rate, jumped to around 10 percent levels on Monday.
Still, the call rate was not too far above the MSF rate, since banks have the option of accessing the emergency funding by using bond holdings parked with the RBI as collateral, although only up to a certain level.
Analysts said the call rate would need to rise well above the MSF rate to have a big impact on constraining trading, and called current call rates manageable.
Traders saw muted impact after the central bank rejected all bids at a 10 billion rupee ($168 million) of inflation-indexed bonds on Monday, saying the amount sold was too small to have an impact on liquidity.
The benchmark 5-year overnight indexed swap rate closed up 2 basis points at 8.30 percent while the 1-year rate closed down 5 bps at 9.25 percent.
Comments
Comments are closed for this article.