Indian government bonds traded higher Wednesday on continued positive sentiment from the central bank’s signal it will hold off further rate-tightening in the near-term, while a bond repurchase program also provided support.
The most-traded 8.13% 2022 bond closed at INR101.01, up from INR100.90 at Tuesday’s close. The benchmark 7.80% 2020 bond ended the session at INR99.04, against INR98.89 at its previous close.
The Reserve Bank of India Tuesday raised interest rates for the sixth time this year, as expected, but said it sees little need for additional hikes in the near-term as it waits for previous monetary tightening to percolate into the system.
The central bank’s decision to repurchase INR120 billion-worth of government bonds to ease the excess cash crunch in the banking system also buoyed bonds. The buyback includes the 7.80% 2020 bond, which will help free up significant space in banks’ trading books. The 2020 bond has been widely shunned by traders on concerns it has very little outstanding limit for further re-issues.
“The RBI’s choice of securities appears to favor duration bonds. While there is no guarantee the RBI will continue to buy back bonds in the 10-year bucket, given the market structure, the central bank may not have much choice,” ICICI Securities Primary Dealership said in a research note.
It expects the 10-year bond yield to trade in the 7.75%-8.00% range for the next month.
Bonds closed off session highs as the INR110 billion debt sale due Thursday spurred traders to trim holdings, particularly in bonds that will be auctioned, to make room for buying the notes at higher yields.
In the currency market, the Indian rupee touched a two-week high against the U.S. dollar early in the session in anticipation of a second round of quantitative easing by the U.S. Federal Reserve. But it ended flat.
The dollar was at INR44.36 late Wednesday, compared with INR44.37 late Friday. It had touched a two-week low of INR44.24 mid-session.
The rupee was also supported by a stronger euro and gains in local stocks. Indian shares ended near a three-week high Wednesday, mirroring gains in most regional markets. The Bombay Stock Exchange’s Sensex gained 0.6% to close at 20,465.74.
Traders said markets are awaiting details of the Fed’s possible announcement of more asset purchases to stimulate growth in the U.S. economy. Uncertainty also loomed over the size of quantitative easing that may be implemented.
In a note, Goldman Sachs said the rupee faces the risk of appreciation, leading to possible RBI intervention in the currency markets if capital inflows threaten financial stability following any quantitative easing by the Fed.
“Significantly, the RBI didn’t explicitly mention the exchange rate in its policy statement. This suggests to us that its general hands-off policy on the rupee may continue, and would likely change only if there was significant volatility,” the note said.
The central bank Tuesday said it would intervene in the currency market “to manage volatility or to manage disruptions to the macroeconomic situation.”