India bonds little changed, debt auction cutoff to guide

Indian government bonds traded steady in early deals on Friday, as traders remained focused on cutoffs on fresh debt supply, for near-term directional cues.

The benchmark 6.94% 2036 bond yield was at 7.0497% as of 10:30 a.m. IST, after closing at 7.0463% in the previous session.

New Delhi will raise 280 billion rupees ($2.92 billion) through a bond sale later in the day, including the liquid 15-year paper.


"(The) market is in a bearish mode, and even if auction demand is decent, the yield may not ease below 7.02%-7.03% range," a trader with a primary dealership said.

Sentiment has turned fragile in part due to the Reserve Bank of India announcing open market debt sales worth 1 trillion rupees for September. In its first such operation in nine years, the RBI drained liquidity equivalent to nearly 0.2% of total bank deposits on Thursday.The RBI is set to sell 250 billion rupees of bonds on Monday and a similar quantum on September 28.

Traders expect the central bank to step up bond sales for liquidity absorption, as policymakers likely seek to strengthen transmission through the banking system before expected rate hikes.

Excess banking-system liquidity can weaken monetary-policy transmission, reducing banks' need to borrow at the Reserve Bank of India's policy rate, which can delay increases in lending rates.

Rate hike bets in India have hardened after the Federal Reserve's move to hike earlier this week, with many now expecting the RBI to raise its policy repo rate by 25 bps on October 7.

The 10-year Treasury yield hit 5% after the Fed raised rates for the first time since 2023. The CME FedWatch tool shows markets are pricing in an almost coin-toss chance of another Fed rate hike in October, and an 88% chance for its December meeting.

RATES

Overnight indexed swap rates were little changed.

The one-year rate was at 6.05%, while the two-year rate was at 6.25%, and the five-year rate was at 6.55%.