India's 10-year bond yield flat as debt supply, rupee decline hurts

India's benchmark 10-year bond yield ended largely unchanged on Tuesday on supply pressure and as the local currency plunged, while the shorter-duration bond yields continued to decline after the central bank's infusion of liquidity banking system. 

The 10-year yield was at 6.7065 per cent, compared with its previous close of 6.7036 per cent.   

"Strong depreciation in the rupee has sparked concerns," said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank. "The market is closely watching how the RBI is intervening, and how it will impact liquidity deficit." The rupee ended 0.6 per cent lower against the dollar at 87.21, its biggest single-session decline in three weeks. 

 

Dash expects the benchmark yield to mostly trade sideways in the near term. 

"Yields will remain range-bound in March as traders will wait for RBI policy and will move in tandem with the US yields," Dash said. 

Heavy supply from states and the upcoming central government supply also curbed any movement in the longer-duration bond yields. States raised Rs 41,050 crore ($4.71 billion) through the sale of securities on Tuesday, and New Delhi is set to raise Rs 32,000 crore via debt sale on Friday. 

The supply comes at a time when investors are wary of adding more long-duration debt to their portfolios. 

Shorter-duration bond yields, on the other hand, were lower as the central bank's $10 billion buy/sell swap scheduled for later this week is set to add around Rs 87,000 crore into the banking system for a period of three years. 

Liquidity infusion in the banking system typically boosts demand for bonds of up five-year maturities. 

Since mid-January, the RBI has infused more than Rs 3.6 trillion into the banking system through a combination of open market and secondary market bond purchases, six-month dollar-rupee buy/sell swap and early-April maturity repos.     

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