BONDS: Bear Flattening On Lead From U.S. Tsys & Crude Oil

INR government bonds were little changed to 2bp cheaper on Wednesday, with a bear flattening bias apparent as benchmark crude oil futures firmed, moving further away from yesterday’s base. Some cheapening in U.S. Tsys would have also aided the modest moves in INR government bonds.

• The latest batch of short run reverse repo operations from the RBI once again failed to remove the total amount of liquidity targeted by the central bank, as it reacts to the liquidity dynamics surrounding the well-documented step to remove INR2,000 notes from circulation (after bank liquidity surged above the INR2tn mark last week). The two-day operations only received INR18.5bn of bids vs. the INR750bn).
• DBRS noted that that the shortening of the term of the reverse repo operations is seemingly “because banks seem reluctant to park excess funds for too long a time period, for fear that there could be unanticipated demand for liquidity. The widening of liquidity surplus, O/N Call and Mibor rates are likely to average in the lower half of LAF corridor.”
• Looking ahead, the broad consensus is for the RBI to remain on hold at tomorrow's policy meeting, leaving the policy rate at 6.50%. Recent inflation prints have undershot to the downside and it's likely the y/y pace will lose further altitude in the next few months (see our full preview of that event here).