Mumbai: Bond yields fell for the second straight day on Wednesday, with the market awash with surplus cash after the Reserve Bank of India (RBI) restricted its daily market operation to one and scrapped the second.
The 10-year benchmark bond yield ended at 6.17% just off the day’s trough of 6.16%, which was its lowest since 28 April, but well below its previous close of 6.30%.
Volumes were heavy at Rs159.8 billion ($3.2 billion) on the RBI’s trading platform with the 2019 bond being most traded.
A steeper fall in yields was prevented by the pipeline of upcoming debt supplies. The government is scheduled to sell Rs120 billion of bonds on Friday that includes Rs60 billion of the benchmark 10-year bond.
While the yields on shorter maturity securities will continue to be pressured lower by surplus cash conditions, longer bonds will move sideways because political risk and the scale of fiscal deficit is an issue, a trader at a foreign bank said.
The spread between the 91-day t-bill and the 10-year bond has widened to 300 basis points since the beginning of April from around 180 basis points at the end of March.
Cash levels have been robust since early April due to heavy government spending, debt redemptions, interest payments and slower credit growth.
The central bank will buy back up to Rs60 billion of bonds through open market operations on Thursday.
At Wednesday’s one-day reverse repo auction, banks sought to park a record Rs1,473.15 billion but the central bank accepted bids for only 1,449.13 billion, with traders citing a depleting stock of debt with the central bank to offer as collateral as the reason behind the partial rejection.
The surplus cash will dwindle as the government is scheduled to borrow a record Rs3.62 trillion in the fiscal year that began on 1 April. Traders expect the figure will rise further when a new government takes office and presents its budget.
India’s month-long national elections end on 13 May and the results are due on 16 May.