Indian Bonds Slide as RBI’s Choice of Purchase Papers Disappoint

  • Indian sovereign bonds slumped as the central bank’s choice of relatively illiquid papers for its bond-purchase program disappointed traders.
  • Surging global oil prices also weighed on sentiment. The yield on the 5.63% bond maturing in 2026 rose as much as 13 basis points to 5.89%, while the 6.64% 2035 bond yield climbed eight basis points.
  • The benchmark 10-year yield advanced nine basis points to 6.18%, its biggest jump in nearly three months.
  • “The choice of illiquid papers has disappointed traders,” said Debendra Dash, head of fixed income at AU Small Finance Bank in Mumbai.
  • “Traders were hoping the RBI will include the 5-year paper,” in the purchase list as it had asked underwriters to buy that paper. Underwriters had to rescue nearly the entire INR110bn of the 5-year bond at last week’s sale.
  • The announcement of a new 10-year bond, which is likely to have a higher coupon, compared to 5.85% for the current benchmark, also damped sentiments, traders said. The central bank Monday said it would buy INR200bn of bonds as part of its INR1.2tr purchase plan for 3Q21.
  • But the choice of papers was likely to help banks book profits, leaving traders with devolved stocks of previous auctions, said traders, who didn’t want to be named, as they are not authorized to speak publicly.
  • The surge in crude, which gained further after OPEC+ ended days of talks without a deal, will further heighten inflation worries in India.
  • Bond yields and swap rates have been rising on fears that the central bank will need to tighten its policy tone as early as Aug 21 and bring ahead policy normalization.

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