* Sharp improvement in liquidity conditions support bonds
* Repo borrowings fall to 115.3 billion rupees
* Strong demand seen in 150 bln rupees debt auction
By Subhadip Sircar
MUMBAI, July 6 Indian federal bonds yields fell
on Friday as domestic liquidity continued to ease sharply while
a sale of 150 billion rupees in government debt attracted strong
Debt markets also benefitted by a safe-haven bid, as
domestic stocks came under pressure after China, the euro zone
and Britain loosened monetary policy on Thursday, sparking
worries about global economic growth.
The easing comes ahead of the Reserve Bank of India's policy
decision on July 31, though few analysts expect the central bank
to follow with rate cuts of its own after declining to do so
last month because of inflationary pressures.
"The RBI may be inclined to cut rates given the global
situation and domestic growth, but may still prefer to wait for
one more policy," said Mahendra Jajoo, head of fixed income at
Pramerica Asset Managers.
The benchmark 10-year bond fell 3 basis
points on the day, ending the week unchanged. Reuters has
switched benchmark designation to this debt starting on Tuesday.
The previous 8.79 percent 2021 10-year bond closed down 2
basis point at 8.32 percent on Friday, while the most traded
9.15 percent 2024 bond settled down 1 basis
points at 8.38 percent.
Liquidity conditions have improved sharply this week, with
the deficit in the banking system narrowing sharply to around
450-500 billion rupees ($8.1-$9.0 billion) from over a trillion
rupees a week ago, according to traders.
Month-end government spending towards salaries, a fall of
the currency in circulation, and the release of oil subsidies
are some of the factors contributing to the easing cash supply,
In another sign of improving liquidity conditions, bids at
the central bank's repo window fell further to 115.3 billion
Bonds were also supported by aggressive cutoffs at a central
bank auction. The RBI sold 150 billion rupees of government
bonds, including a new 14-year paper.
The strong demand helped offset some of the disappointment
after an auction of unused debt limits to foreign institutional
investors on Wednesday attracted only tepid demand, due to
lock-in periods that were seen making the offering more
The one-year OIS rate closed down 3 basis
points at 7.73 percent, while the five-year rate
fell 5 basis points to 7.16 percent.
(Editing by Rafael Nam)