Mumbai: The bond yields and swap rates came off day’s lows on Wednesday after a brief rally spurred by improved cash levels gave way to concerns over bond supplies and near-term policy tightening dampened sentiment. The benchmark 10-year bond yield ended up 3 basis points at 7.84%, after trading in the 7.79% to 7.85% range intra-day. It had risen to 7.89% on Monday, its highest since 7 May, as per Thomson Reuters data.
Volumes were heavy at Rs77.90 billion ($1.7 billion) on the Reserve Bank of India’s trading platform.
The most actively traded one-year OIS rate ended down 3 basis points at 6.28% after falling to the day’s low of 6.24%. It had risen to 6.47% on Monday, its highest since 31 October 2008.
“The market seems to be speculating that with the good PMI (Purchasing Managers’ Index) data ...the economy is on an overdrive,” said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai.
“If capacity constraints continue and demand continues to show the resurgence that it is showing, you will be in line for another rate hike and that’s what is keeping yields biddish.”
India’s surging services industry expanded for the 15th month in July, but at a slower pace than the two-year peak in June, with only growth in input prices picking up speed, a survey showed on Wednesday.
“Liquidity will continue to be positive in August around current levels and range on the Rs500 billion to Rs100 billion surplus situation and I don’t think it will change dramatically,” Krishnamoorthy added.
Banks did not borrow funds from the central bank’s repo window but parked Rs16.10 billion in the reverse repo window on Wednesday, which traders said was a sign of improving cash conditions.
Dealers said they would also watch the results of the Rs130 billion bond auction on Friday for cues on the market demand for debt.
Traders were concerned that the central bank, which has already adopted an aggressive stance with a higher-than-expected rate increase in the July policy review, would follow it up with another round of key rates hike in September.
The 1-year OIS rate could peak at 7% and the 10-year yield could rise to 8% ahead of the 16 September mid-quarter policy review, Krishnamoorthy said.
Dealers said they would also watch for the weekly food and fuel inflation data due at noon 12.00pm on Thursday for cues on broader inflation.
June industrial output data is due on 12 August and July inflation data is expected on 16 August.