Govt bond yields edge higher as investors grapple with policy setback

Indian government bond yields ended higher for a second consecutive session on Monday as investors continued to agonize over the Reserve Bank of India's monetary policy decision. 

The central bank cut the policy repo rate by 25 basis points on Friday, its first reduction in nearly five years, but did not announce any measures to boost banking system liquidity, souring sentiment and putting upward pressure on yields. 

The benchmark 10-year yield ended at 6.7128 per cent, compared with its previous close of 6.7043 per cent. 

The Reserve Bank of India has been injecting liquidity into the banking system, which may be sufficient to ensure core liquidity could end the fiscal year around neutral levels, ICICI Securities Primary Dealership said in a note. 

However, there was an expectation of more by way of announcements in the policy, and that did not happen, it said. 

A falling rupee also weighed on sentiment. 

The currency hit a lifetime low of 87.95 against the dollar on Monday, as the threat of additional US tariffs triggered losses across most Asian currencies. It ended down 0.1 per cent at 87.4750. 

The RBI not including the benchmark bond in an open market purchase also pushed yields higher. 

Still, the 10-year bond is the top choice after the rate cut, Deepak Agrawal, chief investment officer - fixed income, at Kotak Mahindra Asset Management said, amid hopes of further bond purchases. 

The central bank is scheduled to buy another 400 billion rupees of bonds through February 21.   

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