India bonds jump for third day, RBI debt-buying further supports pre-policy mood

MUMBAI: Indian government bonds rose for a third consecutive session on Thursday as the central bank accepted bids at elevated or higher-than-expected prices, lifting sentiment a day before its monetary policy decision, where traders expect more liquidity measures.

The benchmark 6.48% 2035 bond yield ended at 6.6472% after closing at 6.6972% on Wednesday. The yield has eased seven basis points over the past two sessions.

Bond prices move inversely to yields.

The Reserve Bank of India bought bonds worth 500 billion rupees ($5.54 billion) at sharply higher-than-expected as well as prevailing market levels. This has pushed its total bond purchases for the current financial year to a record 6.83 trillion rupees.

While this was the RBI’s last debt purchase for this fiscal, lender State Bank of India said the central bank may need to buy another 500 billion rupees of bonds this fiscal to manage banking system liquidity.

Meanwhile, the RBI is widely expected to hold rates on Friday, but traders are looking out for measures to boost liquidity, including more bond purchases.

Lenders are urging the central bank to tweak its liquidity regulations to ease a deposit shortfall amid rising bond yields, five treasury officials said.

“Some leeway on LCR might be the way and the RBI must ensure to keep banking system liquidity in sufficient surplus going forward to reduce the stress on banks that are borrowing at heavy rates,” said Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America.

Rates

India’s overnight index swap rates ended marginally higher after a choppy session, while traders awaited the RBI’s decision.

The one-year OIS rate was at 5.51%, while the two-year rate was at 5.66%. The five-year OIS rate was at 6.09%.