MUMBAI: Indian bond yields fell in the first trading session of 2012, as expectations of an interest rate cut gathered steam after the central bank's governor said it is likely to begin easing monetary policy to address concerns about economic growth.
In an interview with the BBC, Duvvuri Subbarao said growth was likely to be a bigger concern in 2012, although the risk of inflation remained.
The 10-year benchmark bond yield ended Monday at 8.39 percent, after rising to as much as 8.63 percent in morning trade. It closed at 8.56 percent on Friday.
Total volume on the central bank's electronic trading platform was sharply higher at 256.30 billion Indian rupees ($4.81 billion), compared with 90 billion to 100 billion rupees normally dealt in a day.
"There are strong indications that there will be a monetary policy easing in the near term to tide over the liquidity pressure," said Anoop Verma, an associate vice president with Development Credit Bank.
Banks borrowed 1.17 trillion rupees ($21.95 billion) from the Reserve Bank of India's repo counter under the liquidity adjustment facility on Monday, higher than 1.15 trillion rupees on Friday.
A cash crunch in the money market has sapped demand for government debt at a time when New Delhi is scrambling to complete its borrowing plan for the fiscal year ending March 2012.
This has prompted the central bank to infuse funds via debt buybacks. It has bought 412.1 billion rupees in bonds through open market operations since late November.
The RBI may buy back a further 600-800 billion rupees of bonds through open market operations in the remainder of the fiscal year, said Ashutosh Khajuria, president of treasury at Federal Bank.
Fresh positioning by traders, especially foreign banks, at start of the new quarter also led to a sharp fall in yields.
The benchmark five-year swap rate was ended at 7.03 percent, down from Friday's 7.08 percent close. The one-year rate closed lower at 7.70 percent compared with 7.75 percent previously.
"(The) 10-year benchmark yield could head higher by the close of the fiscal year end to 8.75 percent to 8.90 percent,"said Indranil Pan, chief economist at Kotak Mahindra Bank.
He expects the market to continue its struggle to accommodate the higher borrowing programme in this fiscal year and does not expect the 2012/2013 budget estimate to provide any comfort on federal borrowings.
After market hours on Friday, the central bank said India will borrow an additional 400 billion rupees ($7.53 billion)through bonds in the fiscal year that ends in March and garner a larger-than-expected funds through short-dated paper.
"The market is rejoicing the fact that the uncertainty on the quantum of higher borrowings is out of the way now," Kotak's Pan said.
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