The benchmark 6.94% 2036 bond yield stood at 7.0497% as of 10:30 a.m. IST, following a previous session close at 7.0463%. New Delhi plans to raise 280 billion rupees ($2.92 billion) through a bond sale today, including the liquid 15-year paper.
The Reserve Bank of India's open market operation sale garnered strong investor interest, aiming to absorb surplus liquidity from the banking system. The central bank accepted bonds at yields higher than prevailing market rates, preceding a significant weekly bond auction scheduled for Friday.
Further liquidity absorption measures are anticipated in the coming week. Sentiment has turned fragile partly due to the RBI's announcement of open market debt sales worth 1 trillion rupees for September. In its first such operation in nine years, the RBI drained liquidity equivalent to nearly 0.2% of total bank deposits on Thursday.
The RBI is set to sell 250 billion rupees of bonds on Monday and a similar quantum on September 28. Traders expect the central bank to increase bond sales for liquidity absorption, as policymakers likely aim to strengthen transmission through the banking system before expected rate hikes.
Excess banking-system liquidity can weaken monetary-policy transmission, reducing banks' need to borrow at the Reserve Bank of India's policy rate, which can delay increases in lending rates. Rate hike bets in India have solidified after the Federal Reserve's recent rate hike, with many now expecting the RBI to raise its policy repo rate by 25 bps on October 7.
The 10-year Treasury yield hit 5% after the Fed raised rates for the first time since 2023. The CME FedWatch tool indicates markets are pricing in an almost coin-toss chance of another Fed rate hike in October, and an 88% chance for its December meeting.
Overnight indexed swap rates were little changed. The one-year rate was at 6.05%, while the two-year rate was at 6.25%, and the five-year rate was at 6.55%.
Background
The Reserve Bank of India's recent liquidity absorption measures are part of a broader strategy to manage excess liquidity in the banking system, which can hinder the effective transmission of monetary policy. This comes as global central banks, including the Federal Reserve, are adjusting their policy stances in response to changing economic conditions.
As the RBI continues its liquidity management efforts, market participants will closely watch upcoming bond sales and any signals regarding future rate hikes. The interplay between domestic monetary policy and global economic trends will remain a key focus for investors.
