Indian bond yields fall

Indian federal bonds gained on Friday, driving yields towards a one-month low, as investors increased their debt holdings given no debt auctions will be held next week ahead of the central bank's policy review. Hopes the Reserve Bank of India could purchase bonds via open market operations also helped support debt prices after a sharp spike in repo borrowings from the central bank this week signalled the tightness of liquidity ahead of the festival season, a period when demand for cash rises for purchases.
However, analysts say OMOs are unlikely given the RBI usually does not usually buy back bonds on weeks when it holds no debt auction. "With the liquidity conditions set to tighten going forward due to currency withdrawal from the system due to festival season, there are some expectation of OMO purchases by the RBI," said Sandeep Bagla, executive vice president at ICICI Securities Primary Dealership.
The benchmark 10-year bond yield fell 1 basis point to 8.13 percent after hitting a session low at 8.12 percent, its lowest since September 17. Still, bonds moved largely in a tight trading range during the session. Yields were down 4 basis points on the week. India sold 130 billion rupees of bonds on Friday, with an aggressive cut-off price of 100.16 rupees and a yield of 8.1565 percent for the 8.19 percent 2020 bonds. That was lower than the 8.1639 percent forecast in a Reuters poll.
Trading is expected to be quiet next week, which will have only three trading sessions due to public holidays, and as investors look ahead to the RBI's policy review on October 30. India's central bank is unlikely to lower its key interest rate at its October monetary policy review as inflation remains sticky, but may opt for a cut in banks' reserve requirements to prod them into reducing their lending rates, a Reuters poll of analysts showed on Friday.
"RBI could cut the CRR, and/or cut the repo rate now that the government has taken steps to control the fiscal deficit," said ICICI Securities PD's Bagla. Total volume on the central bank's electronic trading platform was at a moderate 317.75 billion rupees ($5.98 billion). India's benchmark 5-year overnight indexed swap unchanged at 6.97 percent while the 1-year swap rate up 1 basis point at 7.59 percent.