India 10-Year Bond Yield Near 7-Week Low Before RBI Buys Debt

India’s 10-year government bonds were little changed, with the yield near a seven-week low, before the central bank purchases debt this week to help ease a cash squeeze.

The Reserve Bank of India will purchase as much as 80 billion rupees ($1.5 billion) of notes due in 2018, 2020 and 2026 on Dec. 21, according to a statement on its website yesterday. The RBI held interest rates for a fifth month yesterday, while signaling it could cut in coming months. Inflation eased to a 10-month low of 7.2 percent in November, official data show.

“Open-market operations are likely to remain the preferred tool to inject liquidity and that is positive for bonds,” Rohit Arora and Igor Arsenin, strategists at Barclays Plc in Singapore, wrote in a research note today. “Downside surprises in inflation in the past couple of months have paved the way for the central bank to start easing from January.”

The yield on the 8.15 percent notes due June 2022 was unchanged from yesterday at 8.15 percent in Mumbai, according to the central bank’s trading system. It touched 8.14 percent on Dec. 14 and Dec. 17, which were the lowest levels since Oct. 29. The yield has dropped 42 basis points this year.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the RBI said in its statement yesterday.

The central bank has bought 1.1 trillion rupees of government securities this fiscal year that started April 1. Lenders borrowed 1.52 trillion rupees from the RBI’s overnight repurchase window yesterday, the most since March, indicating a cash squeeze in the financial system. Indian local-currency sovereign bonds returned 10 percent this year, the best performance after Indonesia among 10 Asian indexes compiled by HSBC Holdings Plc.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose one basis point to 7.67 percent, data compiled by Bloomberg show.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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