India bonds end flat after RBI's debt purchase let-down

Indian government bonds ‍ended largely unchanged on Wednesday, with ​the former benchmark paper leading losses, after the central ⁠bank once again went ahead with a set of illiquid papers for next week's debt purchase.

The benchmark 10-year yield ended at 6.6105% after closing at 6.6137% in the ‌previous session. ‌Bond yields move inversely to prices.

The Reserve Bank of India has been on a bond-buying ‌spree. It purchased 500 billion rupees ($5.57 billion) of bonds earlier this week and is scheduled to bid for twice that amount through January 22.


Sentiment has still remained tepid as the central bank has been hoovering up illiquid papers - debt ​that is largely not traded - bucking expectations that ​the bank would include the former benchmark bond and other liquid ‌papers in ‍its market operations.

So far this financial year, the RBI ‍has bought bonds worth a record 4.7 trillion rupees, ‌but the purchases have failed to soothe concerns about hefty supply as state and central governments are set to raise more than 8 trillion rupees through March end.

State-run banks preferring state bonds over central notes has also ensured that yields stay elevated.

"Going ahead, we expect the excess supply concerns to continue unless we witness the revival ‍in demand by pensions, insurance and banks," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Traders are closely watching developments ‍on the ⁠potential inclusion of Indian ⁠bonds in the Bloomberg Global Aggregate Index. Analysts at Goldman Sachs say the index weight could be 0.7% and estimate inflows of about $10 billion to $20 billion post-inclusion.

RATES

India's overnight index swap rates eased, led by receiving in the longer end.

The one-year OIS ended 1.5 bps down at 5.4625%, while the two-year OIS rate fell 2 bps to close at 5.55%. The five-year OIS rate eased 3.5 bps to settle at 5.92%. ($1 = 89.8470 Indian rupees)