Indian bonds slump to 2014 lows on concerns about cash conditions

MUMBAI: Government bonds tumbled to their lowest this year after the central bank's move to curb access by lenders to its overnight funding window raised concerns about tightening cash conditions, especially ahead of the resumption of debt auctions.

The Reserve Bank of India on Tuesday reduced the amount that banks can borrow from the emergency marginal standing facility to 0.25 per cent of total bank deposits from 0.50 per cent, while raising the amount they can borrow via the 7- and 14-day term repo window by 25 bps to 0.75 per cent.

Although the move is meant to force banks to access term repos for funding, liquidity tightened as the RBI has yet to announce new term repo auctions, while India is due to hold its first debt auction since early February on Friday.

Expectations of bond purchases via open market operations also took a hit, reinforcing expectations the RBI would inject liquidity via money markets.

"Until Friday's auction things would remain fluid and then from next week onwards we would see value buying taking place. I do not expect a significant fall from current levels," said Shakti Satapathy, fixed income strategist, AK Capital in Mumbai.

The benchmark 10-year bond yield closed 16 basis points higher at 8.96 per cent. It had risen as much as 17 bps to 8.97 per cent, a level last seen on Dec. 6.

India's bond and forex markets were shut on Monday and Tuesday for holidays.

The RBI's decision on Tuesday to keep interest rates on hold as widely expected was overtaken by its decision to curb access to the overnight funding window.

The central bank has been keen to develop term repos as a way to inject liquidity into markets.

Sentiment was also dented by the choice of bonds for Friday's auction, as most of those being illiquid raised concerns of part devolvement of the tranche.

The central bank also barred foreign investors from buying treasury bills of less than one-year in maturity in a bid to curb hot money inflows.

Standard Chartered Bank estimates an outflow of $5-$6 billion in the next few months by foreign investors due to the move.

In the overnight swaps market, the benchmark five-year rate closed 11 bps higher at 8.59 per cent, while the one-year rate ended 10 bps up at 8.66 per cent.