India Bonds Flat as 280bn Rupee Auction Looms

Indian government bonds finished the session with yields largely unchanged. The market is focused on a 280 billion rupee bond auction scheduled for later in the day. This issuance includes the liquid 15-year paper. Traders are watching the cutoff yield closely to gauge demand strength.

Sentiment remains cautious due to significant new supply from the central bank. The Reserve Bank of India announced open market sales worth 1 trillion rupees for September. This is the first such operation in nine years. The initial sale on Thursday drained liquidity equivalent to 0.2% of total bank deposits.

Central bank drains excess liquidity

The RBI plans to sell 250 billion rupees of bonds on Monday. A similar amount is set for sale on September 28. These measures aim to strengthen monetary policy transmission. Excess liquidity reduces banks' need to borrow at policy rates. This can delay increases in lending rates to the private sector.

Rate hike bets firm up

Expectations for an Indian rate hike have hardened. The Federal Reserve raised its benchmark rate earlier this week. Markets now price a high probability of a 25 basis point increase by the RBI on October 7. The 10-year US Treasury yield hit 5% following the Fed decision.

Swap rates show little movement

Overnight indexed swap rates remained stable during the session. The one-year rate stood at 6.05%. The two-year rate was at 6.25%. The five-year rate closed at 6.55%. According to GN auto markets/bonds, the auction cutoff will provide the next key signal for price direction.