Indian government bonds see dip today: What's the reason?
What's the story
Indian government bonds witnessed a decline in early trade today, owing to a weaker rupee and tight liquidity. The fall came despite the Reserve Bank of India's (RBI) recent decision to cancel some bond sales. The central bank's move was seen as an attempt to express discomfort with rising yields and temporarily boosted the market.
Market response
RBI's bond sale cancellation temporarily boosted market
On Friday, the RBI rejected bids for ₹110 billion of the 6.28% 2032 bond. This action temporarily brought down the 10-year yield by seven basis points from its intraday high of 6.60%. However, this rally was short-lived as a weaker rupee, tight liquidity conditions, and an imbalance between demand and supply weighed on market sentiment.
Currency defense
Traders report RBI's intervention to defend rupee
The rupee is hovering around its record low of 88.80 against the US dollar. Traders have reported that the RBI has stepped in to defend the currency, which has further tightened liquidity conditions in the market. "Any liquidity measures by the RBI and any further action like not accepting bids in auction will likely give rate a signal to market," a trader at a private bank said to Reuters.
Banking
A look at banking system liquidity
Liquidity in India's banking system has been fluctuating between surplus and deficit over the past few days, primarily due to RBI's intervention. Data from CCIL shows net liquidity injections have remained within a narrow band of ₹500 billion over the last eight days. Meanwhile, India's overnight index swap rates (OIS) remained unchanged amid thin trading early today with one-year rate steady at 5.4725% and two-year rate flat at 5.4250%.