RBI policy verdict, guidance to drive nervous bond market traders

Indian government bonds were expected to open little changed on Wednesday, according to Business Recorder, as traders awaited the Reserve Bank of India's policy decision. A rate hike is already priced into the market, and traders are also weighing the chance of further liquidity withdrawal. The 6.94% 2036 bond yield, a benchmark, was seen moving within a 7.18% to 7.20% range until the 10 a.m. IST announcement, after closing at 7.1928% on Tuesday.

A Reuters poll cited in the report found that about 60% of economists expect a 25 basis point increase in the key policy rate. Traders have not ruled out additional debt sales or a small increase in the cash reserve ratio, while swap markets have pointed to a possible 50 basis point hike. HSBC, which has called for a 25 basis point hike, estimates the central bank may need to drain around 6 trillion rupees ($62.25 billion) of liquidity over the coming months.

HSBC expects about 2 trillion rupees could be absorbed through higher currency in circulation, with existing tools such as open market operations, FX sales, FX swaps and variable rate reverse repos covering the rest. The RBI sold bonds worth 1 trillion rupees ($10.39 billion) in September, the largest such sale in at least a decade, and has been running variable rate reverse repos every day.