India bond yields may rise as RBI announces liquidity withdrawal operation

By Dharamraj Dhutia

MUMBAI, June 25 (Reuters) - Indian government bond yields are likely to witness an uptick on Wednesday, with shorter-duration papers leading the rise, after the Reserve Bank of India said it will hold a reverse repo auction this week.

The yield on the benchmark 10-year bond is expected to move between 6.26% and 6.29%, a trader at a private bank said, after closing at 6.2504% in the previous session. The five-year 6.75% 2029 bond ended at 5.9870%.

The RBI infuses liquidity through repo and withdraws it through reverse repo operations.

"Though the move was expected, the timing has spoiled market mood, and shorter end should see a selloff, while treasury bill yields could see an adjustment of as much as 10 basis points," the trader said.

The RBI will conduct a seven-day variable rate reverse repo auction worth one trillion rupees ($11.6 billion) on June 27.

India's banking system liquidity surplus has averaged 2.76 trillion rupees per day in June, comfortably above 1% of bank deposits.

Earlier this month, Reuters had reported that the RBI could start conducting variable rate reverse repo auctions to withdraw surplus liquidity as and when required.

Even as shorter-duration bonds are set to face a larger impact of the move, long-duration notes may remain supported as oil prices stayed lower and as U.S. Treasury yields extended losses.

The 10-year U.S. bond yield was at 4.30%, after hitting a seven-week low on Tuesday, as a weaker than anticipated reading of consumer confidence bolstered hopes of a near-term rate cut.

Brent crude was below $70 per barrel after Iran and Israel accepted a ceasefire. RATES India's shorter-duration overnight index swap rates are expected to see paying pressure, while the long-end could remain steady.

The one-year OIS rate was at 5.49%, while the two-year OIS rate was at 5.47%. The liquid five-year ended at 5.6725%. KEY INDICATORS: ** Brent crude futures rose 1.4% to $68.10 per barrel after easing 6% in previous session ** Ten-year U.S. Treasury yield at 4.3023%; two-year yield at 3.7971% ** The RBI will auction treasury bills worth 190 billion rupees ($1 = 85.9320 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)