RBI policy verdict, guidance to drive nervous bond market traders

MUMBAI: Indian government bonds are likely to open largely unchanged on Wednesday, as markets brace for the central bank’s monetary policy decision, with an interest rate hike already priced in and the possibility of further liquidity withdrawal on the cards.

The benchmark 6.94% 2036 bond yield may trade in a 7.18%-7.20% band till the policy decision at 10 a.m. IST, a trader with a primary dealership said, after ending at 7.1928% on Tuesday.

Bond yields rise when prices fall.

Overall sentiment remained cautious as investors braced for a hawkish monetary policy decision, with some fearing additional policy actions along with a rate hike.

A Reuters poll showed that about 60% of economists expect the Reserve Bank of India to raise its key policy rate by 25 basis points, with traders not ruling out additional debt sales or a small hike in banks’ cash reserve ratio (CRR).

Traders said the swap market has also been highlighting the possibility of a larger 50-bps rate hike.

HSBC, which has called for a 25-bp hike, said a rough calculation suggests that the central bank needs to take out around 6 trillion rupees ($62.25 billion) of liquidity from the banking system in the next few months.

“The rise in currency in circulation could take care of 2 trillion rupees, and further use of instruments already at work (OMO sales, FX spot sales, FX swaps, VRRRs) could help with the rest,” HSBC said in a note.

In September, the RBI sold bonds worth 1 trillion rupees ($10.39 billion), the largest in at least a decade, and has been aggressively conducting variable rate reverse repos daily.