India Bonds Fall Tracking Rupee Post RBI FX Swap Announcement

Thursday,   14-Mar-2019   10:15 AM (IST)

India's benchmark 2028 bond fell in a volatile morning trade, as the rupee depreciated against the dollar after the central bank's announcement of liquidity infusion through foreign exchange swaps this month. The benchmark 7.17% bond maturing in 2028 changed hands at 97.52 rupees, yielding 7.56%, at 10:10 a.m. in Mumbai against 97.58 rupees, and a 7.55% yield, yesterday. The note had fallen to 97.30 rupees, lowest since Feb. 28, in early trade. The 7.26% 2029 bond was at 99.15 rupees, yielding 7.38%, against 99.18 rupees and 7.38% yield at the previous close. The Reserve Bank of India said late yesterday that it will inject rupee liquidity for the longer duration through dollar-rupee buy/sell swap. The swap auction of $5 billion for tenor of 3 years will be held on Mar. 26. The Indian rupee fell to 69.75 to dollar in early trade but came off lows to trade at 69.58 against 69.54 previous close. Additional rupee liquidity injected into the banking system, to the tune of as much as 350 billion rupees, would lower the need for open market bond purchases by the Reserve Bank of India, a key source of demand for bonds, traders said. “Since the immediate impact of this move is to reduce the open market purchases, we saw a knee-jerk negative reaction,” a trader with a private bank said. “But since the rupee has recovered a bit, bonds have also recouped some losses.” India’s central bank has purchased bonds worth 2.86 trillion rupees so far this financial year in order to offset the liquidity crunch in the banking system, and is due to buy notes worth up to 125 billion rupees today. The central bank has not yet announced a calendar for OMOs going ahead. It will conduct a 56-day term repo auction worth up 250 billion rupees today and inject a similar amount of funds next week to meet fiscal year end liquidity needs of banks.