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 MUMBAI: Indian federal bond yields nudged higher on Monday in light volume ahead of October inflation data around 0630 GMT, and as traders awaited details of this week's $2.6 billion debt sale.

By 10:30 a.m. (0500 GMT), the most-traded new 10-year bond yield was up 2 basis points at 8.96 percent after moving in a 8.94-8.97 percent band.

Total volume on the central bank's electronic trading platform was lower at 13.25 billion rupees ($265 million), compared with the usual 25 billion to 35 billion rupees dealt in the first hour and half of trade.

"The auction on Friday was not fully subscribed and despite the market reacting positively in a knee-jerk reaction to the rejection of bids, the borrowing remains incomplete and the government will have to return to the market sooner or later," said Kushal Maheshwari, a fund manager with Bajaj Hindusthan.

India raised only 90 billion rupees ($1.8 billion) via sale of bonds on Friday, against a target of 130 billion rupees as the central bank rejected all bids received at the sale of the 2017 paper.

The benchmark five-year swap and the one-year rate were both steady at 7.36 percent and 8.11 percent respectively. They had dropped 7 bps and 12 bps, respectively on Friday.

"The late receiving in OIS on Friday has led to traders covering the flow in bonds, preventing a further upside," the head of trading at a foreign bank said.

Traders will watch the inflation data and details of this week's bond sale due to be announced after market hours for direction.

The wholesale price inflation probably slowed only a tad to 9.61 percent in October from 9.72 percent the month before, as tighter monetary policy had little effect on high food and energy prices, the median forecast in a Reuters poll showed.

Data on Friday showed, industrial output grew at its slowest pace in two years in September, providing further evidence of deceleration in the economy and raising the odds of a pause in the central bank's 20-month-long policy tightening cycle.

Traders said the central bank deputy governor's comments on possibility of injection of liquidity via open market operations (OMO) when necessary may also limit any upside to yields despite supply concerns.

The Reserve Bank of India (RBI) will consider injecting liquidity into the banking system only if the large deficit persists over a longer time even as the interest cycle may have peaked, a deputy governor said on Friday.

Shakti Satapathy, a fixed income strategist at A.K. Capital, said the rejection of bids at last week's auction indicated the RBI was against accepting higher yields, while the possibility of injecting liquidity through OMOs was positive.

"The yield direction would continue to be guided by the fiscal slippage, likely OMO and inflation intensity from the beginning of the next calendar year. The 10-year bond is likely to stay in a range of 8.85 to 9.00 percent through the week," he said.

However, expectations of further issuances of cash management bills following the government's heavy borrowing from the central bank will keep traders cautious.

The federal government borrowed 520.63 billion rupees via loans from the central bank in the week ended Nov. 4, the RBI said in its weekly statistical supplement on Friday.

 

Copyright Reuters, 2011