Indian bonds rise ahead of central bank debt purchase, policy outcome

MUMBAI: Indian government bonds rose for a second consecutive session on Wednesday, lifted by expectations that the central bank would continue buying notes, as the market braces for a record supply next fiscal year.

The benchmark 10-year 6.48% 2035 bond yield ended at 6.6972%, after closing 5 basis points lower at 6.7245% on Tuesday. On Monday, the 10-year yield had spiked to its highest in a year.

Bond yields move inversely to prices.

The Reserve Bank of India will buy bonds worth 500 billion rupees ($5.53 billion) on Thursday, including the liquid former benchmark 6.33% 2035 paper. The purchase is expected to signal the central bank’s comfort with yields.

This will be followed by the RBI’s monetary policy decision on Friday, where it is widely expected to hold rates. However, traders await commentary on banking system liquidity, which the RBI modulates through bond purchase.

“At this stage, we are not expecting any more rate cuts from RBI. However, we expect RBI to maintain its growth-supportive approach and provide adequate durable liquidity by continuing OMOs,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.

The major focus remains on demand-supply dynamics as the government will gross borrow a record 17.2 trillion rupees next fiscal year.

India’s Economic Affairs Secretary on Tuesday told Reuters that the government will use various instruments, including bond switches, to ensure its borrowings in the next fiscal year do not unsettle the market or push up yields.

Rates

India’s overnight index swap rates ended marginally lower in the run-up to the monetary policy decision.

The one-year OIS rate was at 5.51%, while the two-year rate was at 5.64%. The five-year OIS rate was at 6.08%.