Indian bond yields slide as RBIs bond buy plan aids sentiment

By Khushi Malhotra

MUMBAI, April 29 (Reuters) - Indian government bond yields plunged in early deals on Tuesday, as market participants were taken by surprise by the central bank's larger-than-expected bond-buying plan for next month.

The benchmark 10-year bond yield was at 6.3537% as of 10:15 a.m. IST, compared with its previous close of 6.3959%.

"As expected, we had a gap down opening for yields, with the benchmark bond yield hitting 6.32%, but some consolidation is expected around current levels before the next leg of rally begins," a trader with a private bank said.

The Reserve Bank of India said after market hours on Monday that it will buy bonds worth 1.25 trillion rupees ($14.70 billion) in four tranches in the first three weeks of May. The announcement propped up sentiment.

The yield on the 10-year bond hit a near two-week high of 6.4029% on Monday, amid fears that the RBI will pause its bond purchases ahead of its dividend announcement, which generally happens by the end of May.

Investors now expect the benchmark bond yield to test 6.30% levels in the coming days, given that there are no major negative triggers.

Further boosting sentiment is New Delhi's upcoming issuance of the new 10-year bond on Friday, which will replace the existing benchmark paper.

India's banking system liquidity surplus is currently a tad below 1 trillion rupees. Later in the day, the RBI will buy bonds worth 200 billion rupees, taking the quantum of its purchases to 1.20 trillion rupees for April.

RATES

India's overnight index swap (OIS) rates declined due to a strong receiving bias after the RBI announced the fresh liquidity injection plan, which will aid the transmission of further rate cuts. A further decline in U.S. yields will also favour receiving.

The one-year OIS rate dropped 6 basis points to 5.66%, while the two-year OIS rate fell 6 basis points to 5.51% and the five-year OIS rate was 6 basis points lower at 5.64%. ($1 = 85.0530 Indian rupees) (Reporting by Khushi Malhotra Editing by Eileen Soreng)