MUMBAI: Indian government bond yields were barely changed in early trading on Thursday, as traders awaited commentary from the Reserve Bank of India for liquidity management along with its monetary policy decision.
The benchmark 10-year yield was at 6.8624% as of 9:40 a.m. IST, compared to its previous close of 6.8632%.
The RBI is widely expected to hold rates steady in its decision due at 10:00 a.m. IST, but with growing worries about the global economy investors are hoping for a more dovish tone.
A slim majority of economists in a Reuters poll are expecting the first rate cut in October-December.
While most expect 50-75 basis points of cuts, Bank of America’s Vikas Jain said he expects 100 bps of cuts.
Traders will also look out for an increase in transaction limit for foreign investors in overnight index swaps.
HSBC said it expects the RBI’s policy stance to remain unchanged, but the central bank will likely sound more confident than before about getting to its 4% inflation target.
Liquidity management
India’s banking system has stayed in a substantial surplus since the start of July, and traders are anticipating this to persist over the next few weeks.
Daily average bank liquidity has stayed at a surplus of 1.3 trillion rupees ($15.49 billion) since the start of July, and hit a two-year high in early August.
“Government expenditure has been picking up, currency is returning back to banking system, along with dollar purchases from the central bank and these factors have led to a rise in surplus,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
India bonds not reacting to strong domestic growth, yields little changed
“RBI is likely to continue to stick with variable rate reverse repos to ensure call rate remains near the repo rate and would continue debt sales in secondary market.
They could also use FX intervention to limit rupee liquidity,“ Sen Gupta added.
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