MUMBAI: Indian government bond yields are expected to fall sharply in early deals on Tuesday, after the central bank announced a slew of measures to address durable liquidity shortage, raising bets of an interest rate cut next month.
The 10-year bond yield is likely to move between 6.60% and 6.65%, a trader with a private bank said, compared with the previous close of 6.6800%.
“Benchmark bond yield is expected to open with a large gap down, and should consolidate around 6.60% levels,” the trader said.
As part of the package, the Reserve Bank of India will buy government bonds worth 600 billion rupees ($6.94 billion) in three tranches of 200 billion rupees each and conduct a 56-day variable rate repo auction worth 500 billion rupees on Feb. 7. It will also conduct a six-month USD/INR buy/sell swap auction for $5 billion on Jan. 31.
Analysts and traders said these measures could be a precursor to a rate cut on Feb. 7.
The announcement came after the RBI net bought bonds worth 101.75 billion rupees in the secondary market in the week ended Jan. 17, which was its first such operation in more than three years.
This coincided with daily fund infusion using overnight repos.
“The aggregate inflow into the banking system from these measures would be around 1.50 trillion rupees, and even as the system needs more, this comes as a huge relief,” said Kanika Pasricha, chief economic advisor at Union Bank of India.
The first debt purchase auction would be conducted on Thursday, and among other papers the central bank has included the benchmark bond in its bucket list, which will give a further push to yield downwards.
India bond yields rise in lead up to domestic inflation data
Meanwhile, India’s federal budget, due on Feb. 1, will be the next major trigger for bonds.
The budget is likely to focus on fiscal deficit target and borrowing numbers, among others.
Economists in a Jan. 22-27 Reuters poll expected New Delhi to stick to its fiscal deficit target of 4.5% of gross domestic product, with gross borrowing forecast at 14.28 trillion rupees, median forecasts showed.
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