Mumbai: Indian bond yields edged up on Thursday, 8 May, drifting further away from one-month lows hit this week as investors fretted that comfortable cash conditions could see the central bank take more steps to curb price pressures.
Record high oil prices kept inflation worries prominent, and dealers said they were waiting for any comments from Reserve Bank of India Governor Yaga Venugopal Reddy, who is attending a central bank board meeting.
At noon (0630 GMT), the 10-year bond yield was at 7.89%, two basis points above Wednesday’s close. The yield hit 7.78% on Monday, its lowest since 27 March.
“Liquidity is comfortable. That is what is causing a lot of anxiety in the market, whether the RBI will come out with some more surprise measures to curb it,” said Prasanna Patankar, senior vice-president, STCI Primary Dealer.
Dealers say cash conditions improved in recent days as the government has stepped up spending and credit growth has not kept pace with deposit growth, and they expect them to stay comfortable after Friday’s auctions of Rs100 billion of bonds.
Two 25 basis point increases in banks’ reserve requirements will come into effect on 10 and 24 May, draining Rs180 billion ($4.3 billion) from the market in total.
The RBI absorbed Rs466.25 billion at its reverse repo auction on Thursday, more than five times the amount accepted at the start of last week.
Prasanna said the central bank could increase the cash reserve ratio (CRR) incrementally or sell market stabilisation bonds to drain more cash from the system to prevent it adding to inflationary pressures.
“If that happens, traders will wilt under supply,” he said.
“Obviously people will generally be on sidelines, not buying bonds. If it is not going anywhere, it is going to drift.”