India's federal bonds were unchanged on Friday, ending a week in which yields have dropped to a three-month low on strong expectations for rate cuts, while a new 10-year bond was met with aggressive bidding. After trading ended, the central bank announced a surprise open market operation of 120 billion rupees ($2.18 billion) after a pause for two weeks, which is likely to boost bond markets next week.
On Friday, the Reserve Bank of India sold all 70 billion Indian rupees ($1.27 billion) on offer and set a cut-off yield of 8.15 percent, lower than the 8.16 percent forecast in a Reuters poll. The auction is the last one before the RBI is widely expected to cut interest rates by at least 25 basis points during its policy meeting on June 18. "Expectations of a rate cut in the upcoming policy, as well as future OMO expectations will keep supporting bonds," said Kumar Rachapudi, fixed-income strategist at Barclays Capital in Singapore.
The yield for the existing 10-year benchmark ended steady at Thursday's close of 8.35 percent, after falling at one point on Friday morning to 8.30 percent, its lowest since March 14. Trading volume has remained strong, hitting 233.65 billion rupees ($4.24 billion) on Friday, or nearly 2.5 times the daily average. Traders expect the yield of the new 10-year bond to trade at 8.10-8.20 percent in the run-up to the policy meeting, though trading volumes will remain low until more of the debt is sold. Bond yields have eased 17 basis points since the weak January-March growth data was released on May 31. The 1-year OIS rate ended down 5 basis points at 7.58 percent, and the 5-year OIS ended 4 basis points lower at 7.23 percent.
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