Bond Auction Sees Strong Demand
On Monday, the Reserve Bank of India offloaded government bonds valued at 250 billion rupees, or about $2.61 billion. Cut-off yields landed under what the market had projected, a sign that appetite for these securities is strengthening. After the sale, the yield on the benchmark 6.94% 2036 bond settled at 7.0497%, compared with 7.0686% on Friday. That modest easing shows buyers welcomed the auction, although anticipation of a more restrictive policy stance kept the improvement in check.[S1]
Rate Hike Expectations Cap Gains
Even so, expectations that the RBI will drain more liquidity from the banking system and then raise the repo rate on October 7 prevented any sharp, sustained climb. The surplus of funds in the system has shrunk to 6.05 trillion rupees, well below the record 11 trillion rupees seen earlier in the month. This shrinking pool of excess cash is central to the view that policy will tighten, as the central bank works to keep inflation pressures under control.[S1]
Inflation Risks and Swap Rates
Motilal Oswal Financial Services observed in a note that while the August CPI reading is still under control, the risks looking ahead have grown considerably. The firm anticipates that higher food costs combined with energy strains will lift CPI inflation past 6% during October-December. Separately, overnight indexed swap rates edged marginally lower alongside softer oil prices. The one-year rate finished at 6.07%, the two-year at 6.2850%, and the five-year at 6.5425%.[S1]
