India pumps in liquidity; bonds see profit-taking after initial rally

By Swati Bhat

MUMBAI (Reuters) - The Reserve Bank of India (RBI) said on Monday it would pump 360 billion Indian rupees ($4.95 billion) into money markets in October, pledging to buy back government bonds as part of a bid to quell fears of a credit crunch cascading through the economy.

The latest move came after the government on Friday announced a borrowing target of a gross 2.47 trillion rupees ($34.08 billion), with higher-than-expected earnings from its small savings scheme helping to reduce its borrowing needs by 700 billion rupees.

In response, Indian bond yields dropped sharply to their lowest in more than a month on Monday morning, but profit-taking and a falling rupee pushed yields higher towards market close.

The benchmark 10-year bond yield fell as much as 12 basis points to 7.90 percent in opening deals, its lowest level since Aug. 29. But it closed down just 3 basis points at 7.99 percent.

"Markets are cheering after a long time. The cut in borrowing and the (bond buying) open market operation have both helped equally," said Harish Agarwal, a fixed income trader with First Rand Bank in Mumbai.

"But I fear profit booking will keep it between 7.95-8.00 percent levels," he added.

The RBI is widely expected to raise interest rates on Friday at the conclusion of its two-day monetary policy committee meeting.

The RBI said its latest steps followed an assessment of "durable liquidity" needs and the seasonal growth in currency in circulation ahead of upcoming holidays in India.

The auctions would be conducted during the second, third and fourth week of October, the RBI said.The RBI said the sum of 360 billion rupee for open market operations was indicative and it retained the "flexibility to change it, depending on the evolving liquidity and market conditions".

In the currency market, the partially convertible rupee was a whisker away from its record low of 72.99 per dollar touched last month. Having touched an intraday low of 72.97, the rupee ended at 72.91 per dollar, down 0.5 percent from its previous close.

The rupee continues to be the worst performing Asian currency in 2018 having lost 12.4 percent in 2018.

Global crude oil prices, at their highest since November 2014, have been weighing on rupee sentiment as the country imports more than two-thirds of its oil needs.

Traders are also watching how the dollar is faring against other Asian currencies, and the trend in flows in and out of share markets for cues.

($1 = 72.7675 Indian rupees)

(Editing by Simon Cameron-Moore)