BONDS: Yields Nudge Higher, Domestic Liquidity Matters Remain In Focus

The liquid benchmarks on the INR government bond curve saw somewhere between 1-3bp of cheapening come the close on Thursday, with U.S. debt ceiling debate seemingly front and centre for market participants. Elsewhere, a government adviser touted strong credit demand and softer crude oil as supportive factors which could push GDP growth to 6.5% in the current FY.

• Note that ICICI Bank’s head of global markets sales, trading and research has suggested that the RBI may have to buy as much as INR1.5tn of INR government bonds (starting in December) to further bolster banking liquidity, with one eye on the potential for liquidity tightening owing to cash demand surrounding local elections and an expected seasonal pickup in lending around October. The same individual suggested that the RBI may cut the cash Reserve ratio by 50bp in H2.
• A quick reminder that Wednesday saw plenty of meaningful headline flow, with RBI Governor Das pointing to the potential for countries that have amassed “excess” levels of INR to deploy to deploy the capital into INR government bonds, essentially promoting INR-based international trade. Foreigners currently hold less than 1% of Indian sovereign bonds, per BBG.
• Wednesday also saw the RBI step forward to clarify a miswording from Governor Das, who had meant to say that monetary policy has reached a pause, not a pivot (as opposed to the reverse), maintaining the previous line of rhetoric.