India: RBI Support Speculation Spurs Rally in Indian Government Bonds

  • Sovereign bonds in India rallied amid speculation the central bank may soon buy debt to cap surging yields. The yield on the benchmark 10-year bond dropped as much as ten basis points to 7.20% after plunging 17 basis points on 10 May 22 as speculation mounted.
  • The Reserve Bank of India is caught between its desire to contain inflation by raising rates, while at the same time managing record debt sales of INR14.31tr for a government seeking to speed up an economic recovery.
  • “There is an expectation in the market that RBI will take appropriate measures to bring down yields,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank Ltd. The RBI could do either outright open-market operations or a bond switch, he said.
  • With the central bank tightening policy and set to raise rates more, there is concern over demand for debt in the absence of foreign interest. Yet acting to lower bond yields would be contrary to its attempts to drain liquidity from the market.
  • The nation’s benchmark yields have declined about 25 basis points in two days, the biggest two-day drop since May 20. They surged 31 basis points last week after the RBI stunned the markets with an out-of-cycle rate hike.
  • Part of the rally has also been driven by “some shortcovering with the 7.30% level not being convincingly breached,” said Debendra Dash, head of fixed-income at AU Small Finance Bank.

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