Bond yields, swaps decline on RBI policy cues
Bond yields, swap rates closed down on Thursday as market sentiment was supported by RBI deputy’s statement that global developments were being watched for policymaking in India.
But expectations of a strong policy action to rein in domestic inflation kept sentiment cautious. The yield on the 10-year benchmark bond ended down 3 basis points on the day at 7.52%. It touched the day’s low of 7.51% in early trade, its lowest since June 10.
The yield rose to 7.54% in intra-day trade after a government source told Reuters that June headline inflation could rise to 11% as a direct fallout of the fuel price hike effected last week.
Volumes were heavy at Rs 12,665 crore ($2.7 billion) on RBI’s trading platform. “Traders are cautious about inflation and the market is already pricing in a 50-basis points hike in policy rates,” said S Srikumar, manager of fixed income at Corporation Bank.
The benchmark five-year swap rate ended at 6.64%, 6 basis points down from its previous close after falling to 6.60% intra-day, its lowest since June 10. The one-year swap rate ended down 7 basis points on the day to 5.39%, to its lowest since June 17.
RBI deputy governor Subir Gokarn said on Thursday that India’s economic recovery has been strongly consolidated in the early part of 2010, but the central bank is also watching European developments in the context of its policy making.
An RBI research report released on Thursday said the reversal of monetary accommodation would not be effective until there is a reduction in government borrowing. Dealers said they were closely watching the cash conditions in the banking system.
Banks on an average have been borrowing Rs 50,000 crore daily from the central bank’s repo window in June, in contrast to around Rs 50,000 crore that they lent to the central bank until early May.
Traders said they were expecting RBI to extend the liquidity support measures announced in late May at least till end-July when the 11.30%, 2010 bond worth over Rs 30,000 crore matures.
On May 26, the central bank had raised the limit on bank borrowing under its repo facility by 0.5% of their deposits to meet liquidity requirements and had also said it would conduct a second repo auction everyday until July 2.
Traders were wary of adding aggressive positions ahead of a Rs 10,000-crore bond sale on Friday. In interest rate futures on NSE, the September contract implied a yield of 8.0625% while the December contract was not traded.