Mumbai: The government bond yields fell further on Tuesday and touched a fresh two-and-a-half-month low, on growing expectations the Reserve Bank of India (RBI) will announce a bond buyback later in the day to ease tight liquidity conditions.
Disappointing industrial output data for October also strengthened hopes that the RBI will shift its focus on growth when it meets to review policy on Friday.
At 12:10 pm, the benchmark 10-year bond yield was down 2 basis points at 8.43%. It earlier touched 8.41%, its lowest since 29 September.
The yield is expected to move in an 8.35-8.45% range during the day.
Total volumes on the RBI’s electronic trading platform were at Rs 12,500 crore ($2.3 billion), about double the normal volume in the first three hours of trade.
“The market is waiting out for an OMO (open market operations) announcement. If it comes, yields will go down further, else some consolidation can be seen,” said Manish Wadhawan, director and head-interest rates at HSBC.
The RBI has bought back government bonds worth Rs 24,311 crore via open market operations over the past three weeks to help ease tight cash conditions.
Borrowings by banks at the RBI’s daily repo auctions stand at around Rs 80,000 crore, above the RBI’s comfort level.
“The Reserve Bank of India will shift its focus from inflation to growth after the dismal IIP number. We forecast 100 basis points of repo rate cuts in 2012,” a dealer with a foreign bank said.
The RBI has raised interest rates 13 times since early 2010, a policy tightening that has hit growth but done little to counter near double-digit inflation.
The market will closely watch monthly inflation data due on Wednesday to gauge the RBI’s stance on Friday and the instruments it could use to keep growth from derailing, traders said.
Headline inflation for November is expected to ease to 9.04% from 9.73% the month before, according to a Reuters poll.
Worries over the euro zone crisis and slowing growth at home also helped appetite for safe-haven government debt.
Asian stocks sank the euro was near a two-month low as investors took fright at the prospect of mass euro zone sovereign ratings downgrades after the outcome of a “last chance” European Union summit failed to convince markets.
The benchmark five-year swap at 6.95% from 7.03% and the one-year rate at 7.69% from 7.76% previously.