UPDATE 1-Indian bond yields edge lower; OMOs to help

Tue May 22, 2012 6:29pm IST

* Bond yields edge lower on global risk aversion

* Lack of new 10-yr debt disappoints markets

* RBI announces 3rd weekly OMO for Friday (Updates to reflect RBI's OMO announcement)

By Subhadip Sircar

MUMBAI, May 22 (Reuters) - Indian federal bond yields fell slightly on Tuesday after continued global risk aversion offset disappointment the central bank had refrained from announcing a new 10-year paper at its auction this week.

Bond prices could benefit on Wednesday after the Reserve Bank of India said after the markets close it would buy up to 120 billion rupees in debt at the end of the week, its third consecutive open market operation.

That could offset disappointment after the RBI said on Monday it would sell more of the existing 2021 benchmark bonds, despite a ballooning outstanding issuance, instead of issuing a new 10-year paper.

Traders saw that as a tactical move intended to increase the supply of this maturity to facilitate bond purchases.

"It looks like the RBI will support the market via continuous OMOs. The benchmark yield may move to 8.45 percent on the support," said Harish Agarwal, dealer with First Rand Bank in Mumbai.

The benchmark 10-year bond yield ended at 8.52 percent, 2 basis points lower than Monday's close.

Global risk aversion has been front and centre in Indian markets since last week, with the rupee and stocks dropping further after Fitch downgraded Japan's sovereign ratings citing a heavy debt burden.

A risk off global sentiment is favorable to local bonds, though the market is largely domestic investor driven.

Although the central bank has chosen not to intervene in FX markets in recent days, traders say more action is likely.

These expectations have increased hopes for OMOs as the RBI would need to offset the impact on rupee liquidity from its dollar sales in forex markets.

Cash conditions also remain tight, with repo borrowings on Tuesday nearly hitting 1 trillion rupees, well above the RBI's comfort zone.

One-year OIS rate closed steady at 7.99 percent while the five-year rate rose 2 bps to 7.46 percent. (Editing by Rafael Nam)

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