MUMBAI: Indian federal bonds rose on Tuesday, buoyed by the central bank's resumption of debt purchases after nearly a month and the possibility of the government allowing foreigners to own more local bonds.
The Reserve Bank of India said it will buy up to 70 billion rupees of bonds via open market operations on Friday, its first such purchase after May 7.
Dealers said the bonds the RBI has offered to buy are mostly illiquid, except the 8.07 percent July 2017 bond, and are mostly held by banks in their held-to-maturity portfolio.
The central bank will also sell 140 billion rupees of bonds on Friday on behalf of the government.
Bonds got a further fillip after finance ministry officials said the government was likely to raise the debt limit for foreigners in rupee-denominated sovereign debt by $5 billion to $30 billion.
Currently, 75 percent of the total government debt limit of $25 billion has been utilised, data showed.
"The OMO was a surprise and will build momentum for hopes of more such purchases by RBI. The FII limit hike will be medium to long-term positive as a depreciating rupee will be positive for foreigners when they buy," said Lakshmi Iyer, head of fixed income and products at Kotak Mutual Fund.
Foreigners have been heavy sellers of Indian debt in recent sessions, largely on concerns of a falling rupee that lowers their returns.
Yields on the 7.16 percent 2023 bond, which is the new 10-year Reuters benchmark bond, ended 5 basis points lower at 7.19 percent.
The old benchmark 10-year bond yield ended 7 bps down at 7.39 percent.
Total volumes were lower than average at 546.60 billion rupees.
Interest rate swaps fell in line with bond yields.
The longer-end five-year swap rate fell 8 basis points to 6.88 percent. The one-year swap rate was 5 bps lower at 7.14 percent.
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