Indian bond yields edge up

Indian federal bond yields ended slightly higher after trading in a narrow band on Friday as the market priced in expectations of at least a quarter point increase in key rates by the central bank next week but was still uncertain about the quantum of the hike.
The yield on the 7.80 percent, 2021 bond and the 8.08 percent, 2022 bond both ended up 2 basis points each at 8.13 percent and 8.30 percent, respectively. The 2021 bond yield traded in the range of 8.10-8.14 percent, while the 2022 bond yield was stuck between 8.28-8.30 percent intra-day.
Volumes were a paltry 31.70 billion rupees ($717 million) on the central bank's trading platform, compared with a daily average of around 80-100 billion rupees. "The market is divided on rate hike expectations. It is pricing a rate hike of more than 25 basis points but less than 50 basis points," said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai. The market has priced in a possible 25-basis-point increase in key short-term rates, and there is speculation the rise could probably be more. The tone of the Reserve Bank of India's statement is also likely to be hawkish as inflation stays high. Traders said even if there was just a 25 basis point rate increase on Tuesday, expectation of more raises would keep yields elevated.
Dealers expected trading to remain lacklustre on Monday as well, with all eyes focussed on the policy statement on Tuesday. The one-year swap rate ended up 5 basis points on the day at 7.86 percent, while the benchmark five-year swap rate ended steady at 8.26 percent. The front-end of the OIS curve posted a sharper rise after the government sold 60 billion rupees of 77-day cash management bills earlier on Friday, spurring expectations that there could be more such issuances.