In the early hours of trading on Tuesday, Indian government bond yields are projected to experience a slight uptick, influenced by movements in U.S. bond yields and changes in the central bank’s liquidity regulations. Traders anticipate that the benchmark 10-year bond yield will fluctuate between 6.32% and 6.36%, following its previous close at 6.3164%, marking the lowest level since November 9, 2021.

Central Bank’s Revised Liquidity Norms

The Reserve Bank of India (RBI) announced a significant adjustment on Monday, instructing banks to implement a lower-than-expected buffer rate of 2.5% on digitally linked deposits, with a compliance deadline set for one year. Earlier in July, the RBI had proposed an additional 5% run-off factor on digitally accessible retail deposits to better handle potential rapid withdrawals via online banking platforms.

• Expected Impact: Traders predict a negative market reaction to these revised guidelines, suggesting a decline in bond demand.
• Market Sentiment: Despite potential immediate effects, the overall sentiment remains bullish, which could stabilize yield increases.

RBI’s Bond Purchase Program

In addition to the liquidity changes, the central bank is set to purchase 200 billion rupees (approximately $2.35 billion) in bonds on Tuesday, marking its fourth auction this month. Thus far in April, the RBI has acquired bonds totaling 800 billion rupees, with plans for another 200 billion rupees next week. In the first quarter of the year, the RBI bought 2.45 trillion rupees through open market operations (OMOs) and an additional 388.25 billion rupees via secondary market purchases.

Current Market Conditions

As bond yields shift, India’s overnight index swap (OIS) rates are also expected to rise slightly, reflecting the increase in the 10-year U.S. Treasury yield, which currently stands at 4.40%. Traders have noted that the one-year, two-year, and five-year OIS rates have all decreased by approximately 30 basis points this April.

Key Market Indicators

• Brent Crude Futures: Up by 0.6%, currently priced at $66.65 per barrel, following a 2.5% decline in the previous session.
• U.S. Treasury Yields: The ten-year yield is at 4.4106%, while the two-year yield is at 3.7791%.
• State Bond Sales: Indian states are targeting to raise 108.70 billion rupees through upcoming bond issues.
• Repo Auction: The RBI is preparing for a 1-day variable rate repo auction for 1.25 trillion rupees.

As these developments unfold, market participants are closely monitoring the interplay between domestic bond yield movements and the broader trends in global financial markets.