Bond yields edge down; RBI says to buy debt

MUMBAI: Federal bond yields fell on Monday after the central bank said it would purchase bonds via open market operations, helping relieve some of the liquidity worries as companies gear up to pay taxes.

The OMOs from the Reserve Bank of India would resume bond purchases after a two-week absence, helping offset the impact of expected outflows as corporates start paying taxes ahead of the June 15 deadline.

Also supporting bond prices are expectations the RBI will cut interest rates by 25 basis points this month after recently weak January-March economic growth data. Some analysts expect an additional cut in the cash reserve ratio, or the money banks must park with the central bank.

Industrial output data due on Tuesday and inflation due on Thursday will be key in adjusting those expectations ahead of the RBI's policy meeting on June 18.

"People are expecting a 25 bps rate cut and a 25 bps CRR cut in the policy. Such expectations have gained ground since the GDP data," said Sandeep Bagla, a senior vice president with ICICI Securities Primary Dealership.

"RBI has to take steps in order to arrest the fall in GDP by creating conditions conducive for growth, which includes CRR cut," he added.

The benchmark 10-year bond yield closed down 2 basis points at 8.33 per cent after having dropped to as low as 8.31 per cent in early trade.

Total volumes on the central bank's electronic trading platform were at 195.55 billion rupees.

Investors are gearing up for April industrial output data due on Tuesday, with expectations for a 1.7 per cent gain in activity over the previous year after falling in March, a pace suggesting little pick up in the economy.

The 10-year bond yield inched up after Standard & Poor's said India may be the first among the BRIC nations to lose its investment grade rating.

However, traders said the reaction was more muted in debt markets, which is more domestically driven, and added most of the content in the report was the same as in April when S&P downgraded India's outlook to "negative" from "stable."

India's one-year overnight indexed swap rate ended steady at 7.58 per cent, while the benchmark 5-year rate gained 1 basis point to 7.24 per cent. Rates had risen earlier in the day on the back of a global risk rally.

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