Indian bond yields flat

Indian federal bond yields moved in a narrow range with a downward bias on Friday but the one year swap rate eased marginally as traders adjusted positions ahead of next week's policy review. The Indian benchmark 10-year bond yield was at 7.68 percent, steady at Thursday's close, after easing to 7.66 percent earlier. It traded in the range of 7.66-70 percent during the day.
At 7.70 percent, the 10-year yield matched the 2-1/2 month high hit on Wednesday Volumes were a heavy at 66.35 billion rupees ($1.4 billion) on the central bank's trading platform. The one-year swap rate was down three basis points at 5.87 percent after easing to 5.85 percent in intra-day trade. It had risen to a 20-month high of 5.95 percent on Wednesday.
"There is still a talk of double dip and a question mark on the euro zone with the results of the stress test results coming out and there was a sense that the results are going to be a bit bad," said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai.
"Although its not a powerful argument, winds were in that direction which led to a little bit of buying and a little bit of softening in the OIS," Krishnamoorthy added. European bank stress tests are due at 1600 GMT. Newspaper El Pais, citing financial sources, said several of Spain's 18 savings banks have failed to pass the tests, while the head of a German banking group said he was confident that German banks generally will perform well.
"I think the 10-year will remained boxed in a 7.60-70 range and I don't think there will be a reasons to break out on either side but the first trigger could be liquidity improvement," Krishnamoorthy said. A top Indian government adviser on Friday called for strong monetary policy action to combat high inflation, days before the central bank is set to raise rates for the fourth time this year.
The Reserve Bank of India (RBI) is widely expected to raise key interest rates by 25 basis points at the review. Dealers said there was marginal selling after the adviser's comments on rate hikes but they were awaiting the central bank's policy statement on Tuesday for cues on future policy actions. "I see 25 basis points hike in repo and reverse repo rates, bearish talk, possibility of inter-meeting hike thereafter," said Ananth Narayan G., head of rates and credit for South Asia at Standard Chartered Bank. In interest rate futures on the National Stock Exchange, the September contract implied a yield of 8.0316 percent, while the December contract was not traded.