Mumbai: Bond yields briefly fell to their lowest in a week on Thursday following a 50 basis points (bps) rate cut, before pulling back as investors positioned themselves for a $2.3 billion bond sale on Friday.
After market hours on Wednesday, the Reserve Bank of India (RBI) cut its main lending and deposit rate by 50 bps each to prop up the slowing economy.
At 11am, the yield on the 8.24% bond maturing in 2018 was at 6.42% off the day’s low of 6.23%, a level last seen on 2 March. It had closed at 6.44% on Wednesday.
Dealers said supply was the main concern going forward and unless this was addressed through aggressive buybacks, investors would exit when bond prices, which move inversely to yields, rise.
“The rate cut was expected but the delivery was delayed,” said J Moses Harding, head of global markets at IndusInd Bank.
“The market was expecting a more aggressive rate cut and the disappointment is seen as the 8.24% yield is finding it difficult to stay below 6.30% levels,” he said.
Volumes was high at Rs35 billion ($677 million) on the RBI’s trading platform with the 2018 bond being most traded.
The 6.05% bond maturing in 2019 was at 6.09%, below Wednesday’s close of 6.13%.
Dealers said cutoffs at Thursday’s buyback auction where the RBI is expected to buy up to Rs90 billion of debt, and fresh supplies on Friday would be watched.
Economic affairs secretary Ashok Chawla said on Thursday the cash reserve ratio was not cut as there was adequate liquidity in the banking system and the central bank’s (RBI) rate move was aimed at reviving growth.
He also said the government would look at the need for private placement of bonds with the central bank in the coming fiscal year starting April.
Weekly inflation due at noon is forecast to have fallen to a 6-year low, near 3% in late February.
“Given the government’s large borrowing program in FY10, we expect the long end of the yield curve to move up, despite the recent rate cuts,” Goldman Sachs economist Tushar Poddar said in a note.