Indian bond prices crash on RBI announcement of Rs 100 bn bond sale

Indian government bonds yields rose sharply on Monday after the Reserve Bank of India (RBI) announced an open market sale of bonds to remove some of the excess cash left at lenders because of the government's demonetisation move last year.

The announcement from the RBI late on Friday on sale of government bonds worth Rs 100 billion surprised traders, who were expecting it to happen in the month of August when the central bank has to pay a hefty dividend to the government.

The new 10-year bond yield jumped as much as 11 basis points to 6.62 per cent in early trade, its highest level since June 7, from its close of 6.51 %. The five-year benchmark overnight indexed swap was at 6.34 per cent, as compared with its previous close of 6.28 per cent. Indian banks were flush with deposits after the government abolished high-value currency notes late last year in a move to liquidate black money from the economy by forcing people to deposit their unused high denomination notes with banks.

The fall in bond prices comes after a recent lower-than-expected inflation data which had raised hopes for a rate cut before the RBI’s policy review on August 2. The traders expect the central bank to conduct at least two to three more OMO sales in the July-September period, given the surplus liquidity of around Rs 3 trillion in the banking system, which is much beyond the RBI’s traditional tolerance level of Rs 1 trillion.