India bonds at 3-month high as RBI steps in to provide cash

India's benchmark 10-year bond yield dropped to an over three-month low on Monday after the central bank stepped in to provide additional cash to the market through an open market purchase of debt and an additional term repo auction.

The Reserve Bank of India said late on Friday it would buy up to 100 billion rupees ($1.63 billion) of bonds through open market operations on Wednesday, injecting liquidity in a week in which the central bank is skipping its debt auction.

In addition, the central bank's announced a Rs 200 bn 28-day variable rate term repo auction on Tuesday to further provide cash to the market.

The injection of cash comes amid strong foreign inflows into debt and rising expectations the RBI will keep interest rates on hold at its policy review on Jan. 28.

"The market opened with a gap to absorb the news of OMO and remained stable, which means market is directionally positive but tentative on the valuation front," said Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund in Mumbai.

The 10-year bond yield ended 11 basis points lower at 8.52%, a level last seen for the 10-year bond on Oct. 11. Gains this year have also been driven by robust flows from foreign investors, who have bought a net $2.85 billion in debt so far this year, compared with $8.3 billion in net sales last year.

Still, concerns India would soon conduct a proposed 500 billion rupees debt switch is keeping investors on their toes.
Meanwhile, MCX-SX kicked off trading in cash-settled interest rate futures in the 10-year benchmark bond, which attracted the day's highest volume, with a last traded price of 101.9475 rupees.

Swap rates sharply fell with the RBI's cash injection.

The benchmark five-year swap rate ended down 10 bps at 8.09%. The one-year rate was 12 bps at 8.19%. ($1 = 61.4750 rupees)