MUMBAI: Indian government bonds took a hit on Thursday as tight banking system liquidity and the prospect of a trade deal between the U.S. and India sparked selling.
The benchmark 10-year bond yield closed at 6.5357%, up from 6.5040% on Monday. The market was closed for the last two days due to holidays. Bond yields rise when prices fall.
Market sentiment was bearish, with traders paring positions amid hopes for a U.S.-India trade deal. A reduction in steep U.S. tariffs from such a deal could influence the central bank’s rate easing cycle, potentially limiting future rate cuts, traders said.
A Reuters report on Thursday indicated that Indian refiners are likely to slash imports of Russian oil to comply with new U.S. sanctions. This move could remove a major obstacle to a trade agreement with the United States.
Currently, India faces 50% tariffs on its exports to the U.S., with half of these duties imposed in retaliation for its Russian oil purchases. Negotiations for a potential trade deal are ongoing.
“A resumption in rate cuts will require the central bank to highlight pipeline growth risks from U.S. tariffs and passage of the impact from GST changes, besides pointing to the wide real rate buffer,” Radhika Rao, executive director and senior economist at DBS Bank said.
Adding to the market’s woes, India’s banking system liquidity plunged into a deficit for the second time this month due to tax outflows and an increase in cash withdrawals amid festivals.
The deficit was at 702 billion rupees ($8 billion) on Monday, down from a surplus of 1.4 trillion rupees in the previous week.
RATES
Overnight index swap rates also rose amid anticipation surrounding a trade deal.
The one-year OIS rate rose 4.5 bps to 5.4675%%, while the two-year OIS rate settled 5 bps higher at 5.41%.
The five-year swap rate gained 6 bps to 5.6650%.