India bonds little changed, debt auction cutoff to guide

According to Business Recorder, Indian government bonds were steady in early trading on Friday, as market participants awaited the results of fresh debt auctions. The benchmark 6.94% 2036 bond yield stood at 7.0497% at 10:30 a.m. IST, compared with 7.0463% at the previous close. Later in the session New Delhi aims to borrow 280 billion rupees ($2.92 billion), with the liquid 15-year security included in the offer.

A trader at a primary dealership said the market is bearish, and that yields may not fall below 7.02% to 7.03% even if auction demand is adequate. Sentiment has weakened partly after the Reserve Bank of India (RBI) said it would conduct open market bond sales totalling 1 trillion rupees in September. On Thursday the central bank drained liquidity equal to nearly 0.2% of total bank deposits, its first such operation in nine years.

Traders expect the central bank to increase bond sales to absorb liquidity, since policymakers appear keen to strengthen transmission before rate hikes they foresee. Surplus liquidity in the banking system can blunt policy transmission because banks borrow less at the policy rate, which can slow lending rate increases. Bets on an Indian rate increase have firmed since the Federal Reserve raised rates earlier this week, and many market participants now look for a 25 basis point repo hike on October 7.