Mumbai: Indian federal bond yields and swap rates inched up on Tuesday, tracking US Treasury yields and as domestic cash levels remained tight.
Volume was light with traders cautious ahead of an expected interest rate increase by the Reserve Bank of India when it reviews policy on 27 July.
At 10:17a.m., the benchmark 10-year bond yield was at 7.63%, up one basis points from Monday’s close.
Volume was Rs11.8 billion ($250 million) on the central bank’s trading platform, compared with an average of 30 billion in the first hour of trade.
The one-year swap rate and the benchmark five-year swap rate were both up 1 basis point at 5.77% and 6.82% respectively.
“The market is quiet today as liquidity is still tight but no supply this week is a positive,” said S. Srikumar, manager of fixed income at Corporation Bank.
“However, there are no fresh triggers.”
Banks have been net borrowers at the central bank’s repo facility since early June following payments by companies toward telecom spectrum sales and quarterly tax that drained around 1.36 trillion rupees from the banking system.
Dealers expect cash conditions to improve when a 11.30%, 2010 bond matures on 28 July, releasing about Rs302 billion into the banking system.
“Even as the current phase of liquidity tightness ends, there could be phases when the overnight rates could jump back to the upper end of the interest rate corridor,” Kotak Mahindra Bank said in a note.
“There are thus likely to be opposing pulls for the bond yields and the 10-year benchmark yield could stay in the range of 7.55-7.65%.”
Dealers said the market had fully priced in the possibility of a 25 basis points rate increase at next Tuesday’s monetary review and they would watch the tone of the policy to gauge future actions.
The US government debt market retreated on Monday as a rebound in the stock market pared safe-haven demand for bonds and offset grim news on the housing market.