India bonds dip after RBI focus on short-term notes; state debt sale eyed

MUMBAI: Indian government bonds slipped on Monday as sentiment remained weak after the central bank bought mostly shorter-tenor notes in its open market purchase and as traders braced for a heavier-than-expected state debt supply due Tuesday.

The benchmark 10-year yield settled at 6.5912%. 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.

The sentiment in the market weakened after the Reserve Bank of India bought 500 billion rupees ($5.56 billion) worth of bonds in the first of its four planned tranches. More than 240 billion rupees were from securities maturing in 2029 and 2030.

At two open market operation (OMO) auctions earlier this month, the RBI had bought aggregate shorter-tenor bonds worth only 84 billion rupees.

With banking system liquidity still tight, investors expect the central bank to conduct further OMOs to inject funds into the system.

With frictional drivers expected to narrow the core liquidity sharply by the March 2026 quarter, further tranche of OMOs might be on the cards, said Radhika Rao, executive director and senior economist at DBS Bank.

Separately, states are set to raise 354.50 billion rupees through bond sales on Tuesday, up by 200 billion rupees from the scheduled amount.

Analysts estimate total debt supply at around 8.1 trillion rupees for January–March, including about 3.1 trillion rupees from New Delhi and 5 trillion rupees from states, taking quarterly supply to a record high and roughly 25% above the current quarter.

RATES

India’s overnight index swap rates rose in a shallow trading session.

The one-year OIS rate rose slightly to 5.48%, while the two-year OIS rate was up 2.5 bps at 5.58%. The five-year OIS rate closed slightly higher at 5.9350%.