India bonds dip on heavy state debt supply; RBI buying eyed

MUMBAI: Indian government bonds edged lower in early Monday trade, as sentiment soured over a larger-than-expected state debt sale slated for Tuesday, while traders expect the central bank’s bond purchase due later in the day to provide support.

The benchmark 10-year yield was at 6.5729% as of 10:00 a.m IST, a trader with a private bank said.

It ended at 6.5637% on Friday.

The 10-year yield eased 4 bps last week, its biggest weekly decline since the week ended September 5.

Bond yields rise when prices fall.

Indian states are set to raise 354.50 billion rupees ($3.94 billion) through bond sales on Tuesday, up by 200 billion rupees from the scheduled amount.

Traders are wary of excess supply, especially after Friday’s debt auction closed at higher-than-expected cutoff yields.

“There is little incentive to buy bonds at the moment, with system liquidity in deficit and supply outpacing demand,” a trader at a private bank said.

India’s banking system has remained in deficit since December 16.

As of Friday, the cash shortfall in the system stood at 626.7 billion rupees.

To shore up liquidity, the Reserve Bank of India will buy bonds worth 500 billion rupees ($5.57 billion) at its third open market purchase for the month later in the day.

It has bought 1 trillion rupees of bonds so far in December, along with a $5 billion foreign exchange swap.

It will also conduct another buy/sell swap worth $10 billion on January 13.

Traders are still optimistic that the RBI’s liquidity endeavours will help ease the cash crunch and open doors for a sustained rise in bond prices.