Indian Bonds Snap Two-Day Drop as Central Bank Buys Securities

  • RBI buys 150 billion rupees of notes as planned on Thursday
  • More debt purchases likely to boost liquidity: DCB Bank

Indian sovereign bonds halted a two-day decline as the central bank’s debt purchases added cash to the banking system.

The Reserve Bank of India bought 150 billion rupees ($2.2 billion) of notes through open-market operations on Thursday, according to a statement. It has been infusing money to tackle a seasonal funding squeeze that’s worsened by outflows from local-currency bonds. The overnight call-money rate, a gauge of interbank funding availability, dropped to 6 percent after climbing to as high as 7.1 percent earlier, data compiled by Bloomberg show.

“The central bank’s liquidity infusion certainly helped,” said Debendra Kumar Dash, a Mumbai-based trader at DCB Bank Ltd. “Liquidity is generally tight in March and there are expectations that the RBI will address the issue through more bond purchases.”

The yield on benchmark 10-year notes fell two basis points to 7.64 percent, prices from the RBI’s trading system show. The rupee rose 0.2 percent in a second day of gains to 67.0675 a dollar, according to prices from local banks compiled by Bloomberg. The call-money rate averaged 6.77 percent this month through Wednesday, compared with 6.63 percent in February.

Seasonal factors such as a pickup in credit growth closer to the end of the fiscal year in March tend to put pressure on the interbank liquidity deficit, Morgan Stanley economists including Upasana Chachra in Mumbai wrote in a January report. Foreign holdings of rupee debt have fallen by 101.4 billion rupees since end-January, data from the National Securities Depository Ltd. show.

“Banking-system liquidity tends to tighten during March, which exerts upward pressure on the overnight call money rates,” said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Plc in Singapore. “Estimating the future demand for funds is difficult, so the market will be concerned about more liquidity shortage.”

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