Mumbai: The bond yields tumbled to a one-month low on Thursday as excessive cash in the banking system boosted demand for debt, although the prospect of fresh supplies at an auction on Friday helped stem the fall.
The 10-year benchmark bond yield ended at 6.43%, a level last traded on 19 March, down from a close of 6.60% on Wednesday.
The yield has fallen 58 basis points in April, cutting the rise in the 10-year yield since the start of the year to 118 basis points.
Volumes were heavy at Rs183.15 billion ($3.7 billion) on the RBI’s trading platform, with the 2019 bond being most traded.
“Ample liquidity and lack of selling by investors is driving yields lower. The 10-year bond will remain in the 6.40-6.50% range ahead of the policy,” said Arvind Sampath, head of rates trading at Standard Chartered Bank.
The RBI releases its quarterly policy review next Tuesday, and analysts are almost evenly split on whether there will be a rate cut.
“The market is mainly driven by liquidity, all of April it is likely to be like this and maybe in May-June we will start to see some reversal,” said Bekxy Kuriakose, head of fixed income at DBS Chola Mutual Fund.
“The 10-year bond may touch 6.25% due to liquidity push and if the RBI comes up with a positive statement in the policy. However, there aren’t too many triggers for the market right now and it is mainly a liquidity driven scenario.”
Slower lending by banks, increased government spending and redemptions of bonds and bills have flooded the banking system with surplus cash.
The RBI absorbed more than Rs1 trillion ($20 billion) via its reverse repo window for the sixth straight day.
Bonds did not react to data showing annual inflation of 0.18% on 4 April, below the previous week’s annual rise of 0.26% but above a forecast for a fall of 0.18% in a Reuters poll.
The government sold Rs100 billion of treasury bills and Rs35.77 billion worth state development loans this week and is scheduled to auction Rs120 billion of bonds on Friday.
Market participants expect the next few auctions to sail through smoothly on the back of the surplus cash.