Indian bonds rallied the most in four months after the central bank announced fresh measures to boost banking-system liquidity, including government bond purchases and a foreign-exchange swap.
The yield on the benchmark 10-year bond fell as much as eight basis points on Wednesday, the most since Aug. 14, to 6.56%.
The Reserve Bank of India said after market hours on Tuesday that it will buy 2 trillion rupees ($22 billion) of bonds in four tranches over December and January. The RBI also said it will conduct a $10 billion foreign-exchange swap next month.
The measures are aimed to “shock-and-awe” market sentiment, said Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management Ltd. Analysts and traders, including those at RBL Bank Ltd. and ICICI Securities Primary Dealership Ltd., now see scope for the 10-year yield to fall toward 6.50%.
The planned infusion is double the liquidity injection announced earlier this month and is expected to offset cash drain from the RBI’s dollar sales to support the rupee, Asia’s worst-performing currency this year. The measures follow a surge in the benchmark yield to a nine-month high earlier this week.
The latest measure adds to the central bank’s efforts to keep borrowing costs stable and ensure economic growth remains resilient amid punitive US tariffs. Lenders’ overnight borrowing costs rose sharply this week as liquidity tightened following tax outflows and the RBI’s dollar sales to shore up the rupee.
Banking-system liquidity slipped into a deficit of 727 billion rupees on Dec. 22, from a surplus of 2.6 trillion rupees earlier this month, according to data compiled by Bloomberg Economics.
Wednesday’s rally follows a period of strain for the bond market, driven by concerns over a potentially sharp rise in state debt supply. Also supporting the gains was data released after trading ended Tuesday, which showed that a category of market participants including the RBI bought 47.4 billion rupees of notes, the most since Nov. 11.
