Indian Bond Yields Fall as Central Bank Prepares for Debt Purchase

Indian Government Bond Yields Experience a Dip Ahead of Key Financial Events

In a notable shift within the financial landscape, Indian government bond yields saw a reduction in early trading on Thursday. This decline comes as the market anticipates significant events, including the central bank’s bond purchase and an upcoming government debt auction. As of 10:20 a.m. IST, the benchmark 10-year bond yield stood at 6.3793%, a decrease from its previous closing rate of 6.3889%. Earlier in the day, the yield even dipped to 6.3730%, marking its lowest point since December 16, 2021.

Positive Trends in Bond Markets

A trader from a state-run bank noted, "The 10-year yield has comfortably dropped below the 6.40% threshold, and this trend appears to be holding, suggesting potential further declines in the upcoming week." This bullish sentiment among traders has contributed to a 20 basis points (bps) decrease in the 10-year yield since the beginning of the fiscal year on April 1. As the Reserve Bank of India (RBI) continues its cycle of easing interest rates, further reductions in yields are anticipated.

Key Highlights:
- 10-year yield: Dropped to 6.3730%.
- 20 bps decrease since April 1.
- Shorter-duration bonds show even sharper declines, with five-year yields down 35 bps this month.

Central Bank and Government Actions

The RBI plans to acquire 400 billion rupees (approximately $4.68 billion) worth of bonds maturing between 2028 and 2039 on Thursday. Concurrently, the government aims to auction bonds totaling 300 billion rupees, which is expected to create a negative net supply for the day. Notably, the RBI has already purchased bonds worth 400 billion rupees this month, with plans for similar transactions later on.

Liquidity and Interest Rate Outlook

As of April 16, the surplus liquidity in the banking system remained robust, hovering around 1.7 trillion rupees, showing a steady increase since the end of March. Meanwhile, the most actively traded one-year bond was not on the market yet, while the two-year Overnight Indexed Swap (OIS) rate remained stable at 5.54%, and the five-year OIS rate slightly adjusted to 5.67%.

With investors increasingly factoring in the possibility of more rate cuts, OIS rates are expected to trend downward, particularly in the shorter end of the yield curve, which reacts more sensitively to interest rate changes.

In summary, the shift in Indian government bond yields, driven by central bank actions and market sentiment, signals a dynamic period for investors and financial analysts alike. Keep an eye on upcoming developments, as these trends could reshape the landscape of Indian finance in the weeks to come.