India bonds rally may taper ahead of RBI debt purchase, rate decision

MUMBAI: Indian government bond investors would aim to break the 10-year benchmark bond 6.70% yield level on Thursday, ahead of the central bank debt purchase later in the day and in anticipation of liquidity-boosting measures in Friday’s monetary policy decision.

The benchmark 6.48% 2035 bond yield is likely to trade in 6.67%-6.72% band during the session, according to a private bank trader.

The yield ended at 6.6972% on Wednesday, easing seven basis points in two sessions.

“Expectations regarding further liquidity support are building up in the bond market, resulting in short-covering as well as addition of fresh long positions, with a view to break 6.70% on the 10-year bond yield,” the trader said.

The Reserve Bank of India will buy bonds worth 500 billion rupees ($5.53 billion) on Thursday, including liquid former benchmark 6.33% 2035 paper.

The market will watch the cutoff of this paper for any yield signal from the RBI.

This is the last scheduled open market operation from the RBI this fiscal year, taking its aggregate bond purchases to a record 6.7 trillion rupees.

The bank is due to announce the last monetary policy decision of this financial year on Friday. Even though the market has ruled out a rate action, bond investors are rooting for positive guidance and some measures on liquidity management, including more bond purchases.

“The tone of the policy will have a ‘wait-and-watch’ approach, and no hints of further rate cut could mean a hawkish policy, pushing yields higher.

But to support liquidity and the bond market, RBI may continue with liquidity operations such as OMO purchase,“ Nuvama said in a note.