August 5, 2013 / 11:55 AM / 4 years ago

Indian bonds recover on stable rupee, OIS rates drop

* 10-year bond yield ends 8 bps lower at 8.20 pct
    * Heavy issuance lined up in Aug, highest in fiscal first
    * Cash conditions comfortable, call rate well below MSF

    By Subhadip Sircar
    MUMBAI, Aug 5 (Reuters) - Indian government bonds gained on
Monday, recovering from recent sharp falls tracking some
stability in the rupee, although investors remain worried that
further currency weakness could lead the central bank to
announce additional cash-draining measures.
    A fall in U.S. Treasury yields from near two-year highs on
Friday also supported domestic sentiment after modest U.S. jobs
growth added to uncertainty surrounding a rollback in the
Federal Reserve's bond-buying programme. The surge in U.S.
yields had narrowed the difference with domestic debt,
contributing to foreign selling in recent weeks.
    Still, sentiment in bond markets remains frail. Standard
Chartered said recent signs of improving liquidity could spur
the Reserve Bank of India to take additional steps to drain
cash, a strategy it has adopted to curb speculative trading in
the rupee. 
    Yields have risen for eight successive weeks, with the rise
accelerating after the RBI unveiled its liquidity steps on July
    "After the recent measures, the market seems to be
stabilising and some buying is seen at higher levels. The rupee
still seems volatile and the RBI will wait to see the effects of
its measures to play out," said Mahendra Jajoo, head of fixed
income at Pramerica Mutual Fund in Mumbai.
    The benchmark 10-year bond yield eased 8
basis points (bps) on the day to 8.20 percent. Total volumes
were less than normal at 139.70 billion rupees.
    Traders said they will monitor rupee movements and liquidity
    August is also the heaviest issuance month in the fiscal
first half calendar, with bond sales of 790 billion rupees lined
    Banks' borrowing from the marginal standing facility (MSF),
or the central bank's emergency funding facility, averaged about
12 billion rupees in the past week from 259 billion rupees
    The reduced borrowing reflects improved liquidity conditions
as continued government spending has been filtering in, traders
    That would run counter to the RBI's cash-draining measures,
which raised MSF rates to 10.25 percent and is trying to push
banks to borrow at those rates by reducing the amount banks can
borrow from it through other windows. 
    The fall in MSF borrowing has pulled down the overnight rate
 to about 8-8.5 percent from the emergency funding rate
of 10.25 percent seen since the RBI's steps to tighten cash.
    The benchmark 5-year overnight indexed swap rate
 closed down 10 bps at 8.34 percent. The 1-year
rate ended 26 bps lower at 9.11  percent. It
fell to 9.06 pct in session, its lowest since July 23 when the
RBI unveiled its second round of cash tightening measures.

 (Editing by Prateek Chatterjee)

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