India bonds dip on heavy debt supply, surprise cash drain

Indian government bonds fell further on Friday, as traders braced for a heavy debt supply and as a cash withdrawal operation from the central bank took the market by surprise.

The yield on the benchmark 10-year note was at 6.5280%, as of 10:20 a.m. IST. It rose 2 basis points to end at 6.5161% on Thursday.

Bond yields rise when prices fall.


New Delhi plans to raise 280 billion rupees ($3.2 billion) through sales of 15-year and 40-year bonds.

Traders are wary before the auction as the demand for long-term bonds has waned.

The yield on the 6.90% 2065 bond has risen nearly 43 bps since June 6, when the Reserve Bank of India lowered its repo rate by 100 bps.

The RBI also jolted the market with a surprise variable rate reverse repo auction worth 1 trillion rupees, after a month's gap, confusing the market about its stance on liquidity.

The 10-year yield had eased last week when a key investment category that includes the RBI lapped up debt, which was viewed as the central bank's effort to lower yields.

Such purchases by the "others" category have dropped in the previous two sessions, adding to the market's woes.

"Growing possibility of a trade deal, sticky core inflation, and now the RBI's mixed signals, all these factors have hurt demand," a trader at a private bank said.

Adding to the bearish sentiment is uncertainty over whether the RBI will adjust rates next month, even as retail inflation dropped to a record low of 0.25% in October, while core inflation held near 4.4%.

RATES

India's overnight index swap (OIS) rates rose as the mood soured on the RBI's cash withdrawal announcement.

The one-year OIS rose 1.25 bps to 5.4725%, while the two-year rate was steady at 5.44%. The liquid five-year swap rate rose 2 bps to 5.7250%.

($1 = 88.6650 Indian rupees).