The Indian bond market is inching toward a curious limbo and even a quickening pace of sovereign debt sales is failing to stir it up, as traders bet that the Reserve Bank of India will offer them a safety net.
The yield on the benchmark 10-year bond saw daily average moves nosedive to 2 basis points in June, the lowest since 2016, according to Bloomberg calculations. Transaction volumes also dipped by about 30% to 279.5 billion rupees ($3.7 billion) this month compared May, the data show.
The moves in the benchmark security tapered after the central bank scaled back its secondary market bond purchases, a key factor supporting the market since May. Meanwhile, the government has quickened bond sales and expectations are growing that the RBI will buy about half of the record 12 trillion rupees of bond supply this fiscal year.
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“Hopes of RBI purchases in future aren’t allowing a big sell-off in bonds, while huge supply is not letting a big advance,” said Debendra Dash, a fixed-income trader at AU Small Finance Bank.
Bank of America Securities expects the RBI to make $88.5 billion of bond purchases in the secondary market, while several other economists have said that the central bank could end up buying government debt directly. It has so far bought 1.2 trillion rupees of debt and repeated assurances of support.
The transaction volume in bonds had dropped since March following a lockdown of the financial capital Mumbai, that forced many traders to work from home, hampering their ability to take positions. The RBI shortened the bond market trading hours by half to four hours a day.
“Bonds are likely to remain in limbo until we have clear signs of tactical RBI intervention or the government further expands the fiscal deficit and increases bond supply,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors in Mumbai.
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