Indian bonds fall

05 May, 2013

Indian federal bond yields rose on Friday after the central bank warned it had limited room for further monetary easing while delivering a 25 basis point cut in the key lending rate in line with expectations. The Reserve Bank of India also reduced the amount of bonds that banks can hold till maturity while leaving the cash reserve ratio unchanged, disappointing bankers.
The benchmark 10-year yield climbed as much as 4 basis points to 7.81 percent immediately after the decision. However, yields retreated later on hopes the central bank will conduct open market operations to infuse liquidity. RBI Governor Duvvuri Subbarao said OMOs were "as good as" a cash reserve ratio cut, "if not better", to manage liquidity. The 10-year yield closed at 7.74 percent, up 2 basis points. For the week, it ended flat after five consecutive weeks of falls.
After trading hours, the RBI said it would buy back up to 100 billion rupees of bonds on Tuesday. Yields rose early trading on Friday after a central bank report, released late Thursday, said that the scope for further rate cuts was limited. However, the RBI warned that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy. The RBI said it expects the economy to expand 5.7 percent in the current fiscal year, lower than government forecasts.
Most economists now expect a 25 basis points cut in the rest of the calendar year with a fewer number calling a 50 basis points cut. Swap rates were largely unaffected by the RBI move. The five-year swap rate rose 1 bp to 6.89 percent, while the near-end swap ended flat at 7.20 percent.

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