Indian bonds trade mixed on RBI Dec rate cut hopes, temporary rise in CRR limit yields fall

The Indian government bonds traded mixed Tuesday on rising speculation that the Reserve Bank of India will lower its repo rate by 25 basis points to 6 percent in its next month monetary policy meeting.

Also, the RBI’s move to increase its cash reserve ratio (CRR) temporarily to absorb excess liquidity from the banking limited the fall in bond yields.

The yield on the benchmark 10-year bonds, which moves inversely to its price, remained steady at 6.32 percent, the yield on long-term 30-year note bounced 3 basis points to 6.73 percent and the yield on short-term 2-year note fell more than 4 basis points to 6.07 percent by 07:00 GMT.

The Reserve Bank of India (RBI) has stepped up efforts to control the excess liquidity that has emerged out of the whole process of demonetization, announced by Prime Minister Narendra Modi, effective from November 8, 2016.

On Saturday, the RBI unexpectedly ordered commercial banks to deposit their extra cash with it. The CRR remains unchanged at 4.00 percent of outstanding net demand and time liabilities (NDTL) but scheduled banks shall maintain an incremental CRR of 100 percent on the increase in NDTL between September 16 and November 11, Scotiabank reported.

Further, the increased CRR is expected to pause domestic bond-buying, raising government bond yields that have tumbled post the surprise abolition of INR500 and INR1,000 notes, although foreign investors reduced their positions by total USD2.42 billion in the meantime.

The RBI next bi-monthly two-day monetary policy meeting is scheduled to be held on December 6-7. It is widely expected that the current trend of lower inflation expectations will space for the Governor Urjit Patel for further monetary easing.

Lastly, the Indian bonds have been closely following developments in oil markets because of their impact on inflation expectations, as India imports 80 percent of its crude oil requirements.

Crude oil prices fell on worries that the OPEC will be able to cut production output cut during a meeting on Wednesday. The International benchmark Brent futures fell 1.20 percent to $48.62 and West Texas Intermediate (WTI) dipped 0.89 percent to $46.66 by 07:30 GMT.

Meanwhile, the Sensex rose 0.77 percent or 204 points to 26,554 and Nifty-50 futures traded 0.77 percent higher or 62 points at 8,204 by 07:30 GMT.