Indian bond yields gain; crude prices key

Fri Jun 22, 2012 6:04pm IST

* 10-yr bond yield ends up 1 bps on Fri and for wk

* Slump in global crude prices to support bond prices

* More OMOs seen as faltering rupee sparks RBI intervention

By Subhadip Sircar

MUMBAI, June 22 (Reuters) - India's benchmark federal bond yield ended marginally higher on Friday because of profit-taking, but hopes of a sustained fall in global crude oil prices and more central bank bond purchases are likely to keep debt prices supported.

The slump in oil prices is helping ease some of the concerns about inflationary pressures that were cited by the Reserve Bank of India as the main reason for keeping interest rates on hold on Monday, a decision that stunned markets.

Though yields initially surged after the decision, benchmark 10-year yields have closed up only up 1 basis point for the week, helped as well by expectations the RBI will step up bond purchases via open market operations.

The spike in global risk aversion has sent the rupee to a record low against the dollar for a second consecutive session on Friday.

That has forced the RBI to intervene in foreign exchange markets, and is thus raising expectations of more OMOs to offset the impact on rupee liquidity.

"Signals of weak global demand is pushing down crude, and in turn reining in inflation expectations in India, supporting bonds," said Harish Agarwal, a dealer with First Rand Bank in Mumbai.

"Hopes of continuation of OMOs is also helping sentiment."

India's 10-year benchmark bond yield rose 1 bp to 8.35 percent on Friday. Total volumes on the central bank's electronic trading platform were at a high 221.20 billion rupees.

The yield on the new 8.15 percent 2022 paper ended at 8.08 percent, up 3 basis points.

Though the gains for the week were mild, the RBI decision snapped seven consecutive weeks of falling yields, and have put into doubt potential near-term rate cuts, especially after Governor Duvvuri Subbarao followed up with hawkish comments on inflation.

The 1-year overnight indexed swap surged 18 basis points for the week, after falling 3 basis points to 7.75 percent on Friday.

The longer-end 5-year rate dropped 5 bps to 7.19 percent, ending up 3 bps for the week.

Analysts don't expect a rally in bond prices, but at least they expect yields to be capped should the RBI continue to buy bonds via OMOs or in secondary markets.

The RBI bought 112.88 billion rupees in government bonds via open market operations on Friday, lower than the notified 120 billion rupees.

A Reuters poll this week showed traders expect 1 trillion rupees in additional OMOs for the rest of the fiscal year ending in March 2013, both to counter FX interventions and to inject enough liquidity to allow the government to sell a record 5.3 trillion rupees in bonds.

The government sold 150 billion rupees of debt in session, including 70 billion rupees of the most traded 9.15 percent 2024 bond at bullish cutoffs. (Editing by Rafael Nam)

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