RBI truce with govt positive for rupee assets; knee jerk gains in bonds:DBS

Easing tensions between the Reserve Bank of India (RBI) and the government was likely to be positive for Indian Rupee (INR) assets, particularly as the central bank was seen to retain its operational autonomy, said a leading Singapore bank.

Knee jerk gains in bonds are likely, before returning to familiar drivers particularly in midst of the sharp overnight sell-off in the US markets, said the DBS Banking Group in its report on Tuesday.

INR bonds have retained recent gains but struggled to make further headway.

It further pointed out that the 10-year yields (generic) rallied until the September quarter to test past 8.1 per cent, before easing to 7.7 per cent this month. Lower oil and firmer rupee (+3.2 per cent month-to-date) have benefited INR bonds, as domestic and foreign investors made a return.

But public sector banks have also sold into the recent bond rally to trim treasury losses; holdings are down INR 290 billion ($ 3.9 billion) in October-November after INR 265 billion purchases in Q3.

Foreign investors have turned net buyers, with  $700 million inflows yet far in November, reversing part of October's $1.4 billion outflows.

Banking system liquidity is in deficit in this holiday-shortened week and will get a hand from the RBI's open market operations, according to DBS.

The next tranche of INR 80 billion bond buybacks will be conducted on November 22. The 10-Year yields are likely to hover in the 7.65-7.85 per cent range, with bears to monitor domestic fiscal concerns and oil price direction. Implied rates have pushed back rate hike expectations to Q2 19, with the easing hike-premium keeping short-end rates down.