Mumbai: Bond yields dropped on Wednesday as surplus cash with banks was seen as more than adequate to absorb large auctions this week.
At 10:47am, the 10-year benchmark bond yield was at 6.71%, below its previous close of 6.75% when it had touched a three-week low of 6.62%.
Volume was a low Rs16 billion ($320 million) on the Reserve Bank of India’s trading platform with the 2019 bond being most traded.
“Liquidity in the system is comfortable, the auction amount is already factored in and there are no big negatives as of now,” said Srinivasa Raghavan, vice president & head of treasury at IDBI Gilts.
“Friday’s auction is the last one before the policy meet and the market view is divided on expectations for a rate cut. Hence the 10-year yield should be around 6.60% till then,” he said.
The RBI will hold its quarterly policy meet on 21 April and analysts see room for further interest rate cuts.
The government will sell Rs100 billion of bills during the day, Rs35.77 billion of state development loans on Thursday and Rs120 billion of bonds on Friday.
Banks parked a total of Rs1 trillion with the RBI via its reverse repo window on Monday, indicating surplus cash in the banking system.
Market participants expect the excess cash to absorb the upcoming debt supplies till about the end of the month.
Economists Indranil Pan and Kaushik Das at Kotak Mahindra Bank said in a recent note most of the significant inflows was over with only Rs68.35 billion of state government loan redemption on 21 April.
“This could lead to a tempering of the replacement demand and especially so if the RBI decides to temporarily suspend the open market operations auctions for buying back securities from the market in the wake of the huge liquidity surplus,” they wrote.
Some dealers said lower US yields and global oil prices were also supporting sentiment pushing yields further down.