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Indian government bonds weakened at the start of the week as investors reacted to sustained supply pressure, led by higher-than-expected borrowing plans from state governments. The benchmark 10-year yield edged closer to recent highs, reflecting cautious sentiment ahead of quarter-end. States have already raised significant funds this quarter, with more issuance expected. Foreign investor outflows and weak auction demand added to the pressure, even as the Reserve Bank of India provided liquidity support. Markets remain watchful of supply dynamics despite signs of easing inflation.
Indian government bonds opened the holiday-shortened week on a weaker note, as investors continued to grapple with persistent supply pressure, particularly from state governments planning to raise more funds than initially expected through debt sales. The steady flow of issuance has kept market participants cautious, with limited appetite for fresh bond purchases. Advertisement
The benchmark 10-year government bond yield moved up to 6.6370 per cent in morning trade, compared with 6.6017 per cent at the previous close. Bond prices fall when yields rise, and traders noted that yields were nearing recent highs amid sustained supply concerns.
State governments are preparing to borrow INR 332.20 billion through bond sales scheduled shortly, around 25 per cent higher than the earlier indicated amount of INR 268.55 billion. This increase has added to market nervousness, as states have already raised close to INR 1.8 trillion through bond issuances so far in the current quarter. Dealers expect the borrowing calendar to remain crowded in the coming days.
Market participants pointed out that the supply pipeline is already heavy, with the most issuance-intensive part of the year still ahead. As a result, the near-term outlook for bond yields remains tilted upwards, according to traders at primary dealerships.
Selling pressure had intensified toward the end of the previous week after weaker-than-expected demand at an auction of five-year government bonds. Investors stayed cautious about adding long positions ahead of the quarter-end and the close of the calendar year, a period when foreign investors typically rebalance their portfolios.
Foreign portfolio investors have continued to pare exposure to Indian debt, with net outflows of around INR 109 billion recorded so far this month. This has added to the strain on bond prices, despite supportive actions from the central bank.
The Reserve Bank of India has attempted to ease liquidity conditions by purchasing government bonds worth INR 1 trillion and injecting INR 450 billion through a foreign exchange swap during the month. However, these measures have not been sufficient to offset concerns arising from elevated supply and foreign selling.
Minutes from the central bank's latest policy meeting indicated that a possible moderation in economic growth next year, along with subdued inflation, could create room for further interest rate cuts. Even so, market sentiment remained guarded as traders weighed this outlook against near-term supply pressures.
In the interest rate derivatives market, overnight index swap rates were expected to stay under paying pressure as expectations of aggressive rate cuts have softened. No trading activity was reported in swap contracts during early hours.
Source Reuters
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