Mumbai: The bond yields ended largely steady while swaps edged up on Monday after moving in a narrow range, as markets braced for an expected quarter-point rise in Reserve Bank of India (RBI) interest rates.
Unwinding of monetary easing that started in October 2009 should continue until inflation expectations are firmly anchored and inflation is brought down, The central bank said in its macroeconomic report on Monday, a day before its quarterly policy review.
The benchmark 10-year bond yield closed down one basis point on the day at 7.67% after moving in the range of 7.66% to 7.69%.
Volumes were a heavy Rs60.30 billion ($1.3 billion) on the RBI’s trading platform.
“Markets are factoring in a 25 basis points rate hike tomorrow (on Tuesday), if it (the bank) will be (more) hawkish than that then there will be a reaction plus traders are also light,” said Manish Wadhawan, director and head of interest rates at HSBC India.
“Personally I feel with the kind of (liquidity) tightness the system has been subjected to and if its going to continue like this for a period of time then I think the probability of an inter-meeting rate hike dwindles. It’s a matter of time that we are headed towards a 4.5-6% corridor very soon.”
The most-traded one-year rate ended at 5.91%, up four basis points from Friday’s close. The Clearing Corp of India (CCIL) data showed the day’s range at 5.90-5.93%.
Cash conditions in the banking system have been tight since early June after cash outflows on account of telecom spectrum auction payments.
“The RBI is clearly making a distinction between normalization and real tightening and the former is not considered to be hurting growth,” RK Gurumurthy, head of treasury at ING Vysya bank in Mumbai said.
Dealers said the possibility of a reduction in borrowing due to improved government finances could ease the supply of bonds to the market and limit the rise of the 10-year bond yield above 7.80% in the near term.
However, swap rates will be under pressure due to cash tightness in the banking system and most traders see it rising as high as 6.10% if tightness persists.
India’s headline inflation WPI in July could be around 11%, India’s chief statistician, TCA Anant, told reporters on Monday.