Indian bonds overlook global debt selloff as RBI opens cash tap

Indian bonds gained, bucking a global debt selloff, after the central bank said it will inject a further $21.5 billion into the banking system to ease an seasonal cash squeeze ahead of the March 31 financial year-end.

The Reserve Bank of India (RBI) will buy one trillion rupees ($11.5 billion) of bonds in two equal tranches on March 12 and 18, it said in a statement late Wednesday.

It will also hold a $10 billion dollar-rupee, buy-sell swap auction for a three-year tenure on March 24, providing further rupee liquidity to the market.
While the liquidity measures are supportive for Indian bonds and swaps, they come against the backdrop of a global bond market selloff, driven the rout in German bunds.
The 10-year yield fell as much as three basis points to 6.68%, while the rupee rose 0.1 per cent against the dollar.

“A strong move to boost liquidity suggest that the overall policy stance is accommodative, with an eye on facilitating policy transmission,” DBS Bank Senior Economist Radhika Rao wrote in a note. The latest measures are expected to turn core liquidity to a surplus, she said.

Banking system liquidity typically tightens ahead of advance tax payments by companies to the government. A report this week by the State Bank of India, the nation’s largest lender, said that the central bank will need to pump in another 1 trillion rupees by March to keep liquidity in equilibrium.

The RBI has already injected one trillion rupees via bond purchases through auctions and $15 billion equivalent of rupee liquidity via two swap operations. It has also conducted longer-term variable repo operations.

The measures have helped ease the shortfall from a decade-high 3.3 trillion rupees in January to 322 billion rupees currently, according to a Bloomberg Economics index.

The central bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions, it said Wednesday.