Mumbai: The bond yields eased on Wednesday, as high liquidity levels in the banking system pushed demand for debt from banks to meet reserve requirements, but the fall was limited on concerns of RBI policy tightening.
The yield on the 10-year benchmark bond ended at 7.79%, a basis point below Tuesday’s close. Last week, it had fallen to 7.71%, its lowest since 9 February.
In intraday trade, the 10-year yield fell as low as 7.75%.
Volumes were a heavy Rs98.8 billion ($2.2 billion) on the central bank’s trading platform.
Cash levels in the banking system rose as banks parked Rs1.2 trillion in the Reserve Bank’s reverse repo window, mainly due to higher government spending in the beginning of the new fiscal year that started in April.
Traders said high liquidity levels supported demand from banks for debt to keep up with the central bank’s statutory liquidity ratio (SLR), which requires them to invest at least 25% of their deposits in government bonds.
“There appears to be SLR demand and comments that there may not be a new 10-year bond issuance in the market was positive,” said Paresh Nayar, head of FX and money markets at First Rand Bank.
“You already have the 6.35% 2020 bonds, in which there is already good demand,” he added.
The government may delay issuing a new 10-year benchmark bond as the central bank and finance ministry want to increase volumes in the existing 6.35% 2020 benchmark paper and avoid volatility, two sources with direct knowledge said on Wednesday.
However, concerns of more monetary action persisted, possibly through a hike in the cash reserve ratio (CRR) -- percentage of deposits banks must keep with the RBI in reserve -- when the Reserve Bank of India reviews its policy on 20 April.
Economists widely expect the central bank to raise interest rates in the review. Last month, the RBI unexpectedly hiked rates for the first time since it began cutting in 2008, citing inflationary pressures and a steady economic recovery.
Traders braced for supplies later this week, the first in the 2010-11 fiscal year. The government is due to sell Rs120 billion of bonds on Friday, part of the Rs2.87 trillion it plans to sell in the April-September period.
The benchmark five-year interest rate swap ended at 6.88/92%, from Tuesday’s close of 6.91/93.
In interest-rate futures on the National Stock Exchange, the June contract implied a yield of 8.2688%.