Mumbai: Indian federal bond yields rose on Tuesday as cash conditions were tight ahead of treasury bill auctions, while a weakening rupee was also seen as putting pressure on liquidity.
The central bank usually intervenes in the currency market through state-run banks and a 3.3% drop in the rupee this month could prompt them to sell dollars for rupees, which could reduce availability of cash in the banking system.
At 10:45 a.m, the yield on the 10-year bond was at 8.98%, up from 8.97% at close on Monday when it hit a two-week low of 8.94% during trade.
“As long as crude remains in a narrow range, I expect the 10-year yield to hover between 9 - 9.10%,” the head of fixed income in a mutual fund said.
US crude for October delivery stayed above $115 a barrel, supported by worries that tropical storm Gustav in the Caribbean would turn into a hurricane and disrupt oil output in the Gulf of Mexico.
The central bank will auction Rs40 billion ($909 million) of treasury bills on Wednesday, and traders are expected to keep aside cash for the sale.
A trader with a foreign bank said the central bank was unlikely to intervene heavily in the currency market as that could further tighten liquidity.
The central bank has kept a tight leash on liquidity in recent weeks to cool demand in the economy and reduce inflationary pressures. Inflation was at 12.63% on 9 August, its highest in more than 13 years, and the central bank has aggressively tightened its policy since June.
Overnight cash rates was at 9.10/9.20%, higher than the central bank’s main lending rate, the repo rate, which is at 9%.