Indian bond yields dip after RBI's currency move improves appetite
Indian government bond yields fell at the start of the week after the central bank's move to withdraw highest value currency notes improved investor appetite for fixed income assets.
The 10-year benchmark 7.26% 2033 bond yield (IN072633G=CC) was at 6.9835% as of 10:00 a.m. IST after closing at 7.0106% in the previous session. The three-year to five-year bond yields were down 7-8 basis points.
"As expected, bond yields have reacted to the development as the market expects the banking system liquidity to rise and money being redirected to risk-free sovereign assets in the near term," a trader with a private bank said.
On Friday, the Reserve Bank of India said it would withdraw its highest denomination 2,000 rupee note from circulation, whose value has declined to 3.62 trillion rupees ($44.27 billion), as of March 2023.
Market participants have said the withdrawal would lead to an increase in the banking system liquidity, and ultimately flowing into debt investments, mainly in the shorter tenor papers.
Kotak Institutional Equities estimates liquidity to improve by around 1 trillion rupees, while QuantEco Research pegs the potential impact at 400 billion rupees to 1.1 trillion rupees. ICICI Securities Primary Dealership said the liquidity surplus could increase to 1.5 trillion rupees to 2 trillion rupees.
Liquidity is also set to improve after the RBI approved a surplus transfer of 874.16 billion rupees to the government for the fiscal year ended March 2023, which could flow into the banking system in the form of government spending.
Still, the 10-year benchmark bond yield is facing strong resistance and may not fall sharply amid constantly rising U.S. yields.
The 10-year U.S. yield jumped 25 basis points in the last six sessions and was trading around 3.65%, especially after Federal Reserve officials said inflation did not appear to be cooling fast enough to allow the Fed to hit a pause in its rate-hike campaign.
($1 = 81.7800 Indian rupees)