India bond yields slip on short-covering

Indian federal bond yields and swap rates slipped on Friday after a deputy governor at the central bank said adequate measures had been taken to contain inflation and that food prices would begin to ease on the back of good monsoon rains. The yield on the benchmark 10-year bond dropped as much as 8 basis points to 7.81 percent, from before the comments, while swap rates fell between 6 to 8 basis points.
The 10-year bond yield closed at 7.83 percent, down 8 basis point from its previous close, which was its highest level since May 7. Volumes were a heavy at 107.05 billion rupees ($2.3 billion) on the central bank's trading platform. "The relief in the bond market today will be short-lived. It was more of short-covering today as traders had been selling heavily over the last few days," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.
The benchmark 5-year overnight indexed swap rate eased to 7.29 percent from its previous close of 7.40 percent while the one-year rate eased to 6.25 percent from 6.35 percent. "These comments have calmed market fears of very aggressive rate hikes going ahead. They do suggest the central bank may pause, but it is too premature to say so with just one comment, we will have to see RBI language in the coming days," said Anoop Verma, an associate vice president at Development Credit Bank.
The market had become very bearish on bonds after a senior central bank official jolted markets last Thursday with unusually blunt criticism of monetary policy, saying current interest rates would not tame inflation and aggressive action was needed. The remarks came shortly after the Reserve Bank of India raised rates more than expected and adopted a hawkish tone on inflation.
In its quarterly review last week, the central bank lifted the repo rate by 25 basis points to 5.75 percent, as expected, but raised the reverse repo rate by 50 basis points to 4.5 percent, more than the 25 basis point increase economists had expected.
Traders now expect atleast another 25 basis point hike in key rates at the mid-quarter review on September 16. "The non-farm payroll data and choice of next auction securities will be the main triggers next week," said Hitendra Dave, head of global markets at HSBC India. "Levels are fairly elevated so we need a stream of negative news or comments to trigger buying."