MUMBAI: Indian federal bond yields dropped for a fifth session on Wednesday as the choice of papers at this week's buyback by the central bank boosted expectations for a good response.
The central bank has been buying back bonds for the past two weeks to help ease a cash crunch. However, the buybacks have been lower than targeted amount with banks either unwilling to sell at the levels offered by the central bank or because the papers chosen were in the hold-to-maturity books of banks.
Debendra Dash, a fixed income trader with Development Credit Bank, said the buyback scheduled on Thursday for up to 100 billion rupees ($1.9 billion) would likely be fully met because of the 7.83 percent 2018 bond that is widely held by banks.
The central bank had bought back 94.35 billion rupees and 57.83 billion rupees at each of the two previous buyback auctions against the target of 100 billion rupees.
"Further there is no auction next week due to the advance tax payments, so that is also bonds positive. I expect the 10-year yield to breach 8.50 percent since no hike is expected in the upcoming policy but it may hold in a 8.50-8.55 range today," Dash said.
By 11:30 a.m. (0600 GMT), the benchmark 10-year bond yield was down 4 basis points at 8.54 percent, taking the fall this week to 11 bps and adding to 17 bps drop last week. The market was closed on Tuesday for a holiday.
Total volume on the central bank's electronic trading platform was heavy at 76.30 billion rupees, compared with the usual 45 billion to 50 billion rupees dealt in first two and half hours of trade.
"I do not see much downside for yields from current levels as investors will not buy bonds below the repo rate," a senior dealer with a foreign bank said.
"I expect some profit-taking to start kicking in as soon as bond yield touches 8.50 percent or so," he added.
The central bank is widely expected to hold rates steady at its upcoming monetary policy review on Dec. 16. The repo rate has been increased 13 times since mid-March 2010, to 8.50 percent currently.
Gains in equity markets may also limit a sharper downside. The main 30-share BSE index was trading up nearly 1 percent, taking cues from firmer Asian markets.
Expectations also remain for a cut in the cash reserve ratio, or the proportion of deposits that banks need to set aside with the central bank as cash. The ratio now stands at 6 percent.
The benchmark five-year swap was down 1 basis point at 7.15 percent, while the one-year rate was up 1 basis point at 7.92 percent.
Traders said tight liquidity would keep a floor on the shorter-end swap rates while the central bank's assurance to keep cash in the banking system adequate would limit any major rise.
The central bank will continue to inject liquidity to ensure smooth functioning of the financial markets and tide over tight conditions in the near future, a deputy governor said on Saturday.
Banks borrowed 933.70 billion rupees from the central bank's liquidity adjustment facility on Tuesday, close to the 1 trillion rupees borrowed on Monday and much higher than 688.25 billion on Friday. Liquidity is expected to tighten further in the coming weeks due to outflows related to advance tax.
Asian shares and the euro gained on Wednesday on hopes that the threat of mass credit rating downgrades will pressure European leaders to come up with a convincing framework for resolving the euro zone debt crisis at a crucial summit later this week.
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