India 10-year bond yield at 20-month high, traders seek RBI support

India's benchmark 10-year bond yield rose to its highest level since April last year as investors grew cautious of the heavy government debt pipeline, rise in global oil prices, and lack of direct support from the central bank. Traders said the absence of a new 10-year bond as part of the papers on sale at the upcoming debt auction on Friday also weighed on sentiment as the outstanding stock on the existing benchmark is already at Rs 1.48 trillion ($19.77 billion).

India is selling bonds worth Rs 24,000 crore, including Rs 13,000 crore of 10-year paper on Friday. Traditionally, the government has issued a new bond when the existing paper has reached an outstanding of around Rs 1.5 trillion (($1 = Rs 74.8425). The benchmark 10-year bond yield was at 6.49 per cent by 0710 GMT, after touching 6.5 per cent - its highest since April 13, 2020.

"The sentiment has turned somewhat dovish, despite the Reserve Bank of India (RBI) commentary," said Suyash Choudhary, head-fixed income, IDFC Asset Management Company.

"This is largely on account of two reasons: the shorter term variable rate reverse repo auctions which have further driven up yield on effective overnight deployment by banks and the secondary market selling of government bonds by the RBI."

The central bank held rates steady earlier in the month, saying it would remain accommodative to support recovery amid rising Covid cases driven by the new Omicron variant of the novel coronavirus.

The RBI sold Rs 2,035 crore under open-market operations in the week to December 17, it said in its weekly statistical supplement released on Friday.

Traders said the rising global oil prices, heavy supply of bonds at the weekly auctions, and high domestic retail inflation will all sustain the upward pressure on yields. Oil prices extended gains on Tuesday, trading near the previous day's one-month high on hopes that the Omicron variant will have limited impact on fuel demand.

Traders are expecting the central bank to come in with some form of support to help the market ahead of the debt sale on Friday.