Indian bonds gain

Indian government bonds rose for a second session on Friday but extended their losing streak to a seventh week as the central bank's steps to further tighten cash to curb rupee speculation showed high short-term rates were here to stay. A 150 billion rupee debt sale was fully sold with cut-off broadly in line with market expectations for higher yields, in another indication the Reserve Bank of India is keen to drain cash to defend the rupee.
Bond dealers are awaiting the central bank's monetary policy review on July 30 which may provide some clarity on how long the current steps to tighten liquidity are likely to continue. The tightness in cash is expected to be more pronounced next week when lenders will be required to maintain more cash with the central bank on a daily basis as mandated.
"I don't think the RBI will do a cash reserve ratio or repo hike, given the liquidity tightness and spike in rates. Neither do I think the central bank will give a signpost for easing the current measures," said Sujan Hajra, chief economist at Anand Rathi. The benchmark 10-year bond yield fell 3 basis points on the day to 8.16 percent. It traded in an 8.09-8.20 percent band. For the week, yields rose 22 bps.
Bond investors also drew comfort from the chief economic adviser Raghuram Rajan's comments that he hoped the recent steps to stabilise the rupee would not be a substitute for steps like increasing interest rates. Still, demand for bonds remains muted with volumes languishing at 2013 lows as dealers wait to see whether Duvvuri Subbarao now embarks on explicit monetary tightening by raising the cash reserve ratio or the repo rate.
The central bank is expected to keep rates steady until the October-December quarter in a bid to defend the rupee, as per a Reuters poll. The OIS curve flattened as the central bank's steps to drain liquidity saw the near-end sharply rising to a near five-year high during the week. The negative spread between the one- and five-year rates has widened to 102 bps from near zero before the central bank began tightening cash on July 15. The one-year rate closed 1 bp down at 9.30 percent. The benchmark five-year OIS rate closed flat at 8.28 percent.