India bonds yields steady around key levels as RBI to mop up liquidity

MUMBAI, July 15 (Reuters) – Indian government bond yields were largely steady after rising in opening trades on Tuesday, as traders cool their heels around key levels, and eye the response to the central bank’s liquidity withdrawal operation.

The yield on the benchmark 10-year bond was at 6.3173% as of 10:00 a.m. IST after closing at 6.3163% on Monday.

The Reserve Bank of India will conduct a three-day variable rate reverse repo auction for 1 trillion rupees ($11.6 billion). This would be in addition to 1.52 trillion rupees that it withdrew from the banking system on Friday via a seven-day operation.

This is the second straight week that the RBI is conducting a shorter duration cash withdrawal operation, after doing a seven-day equivalent.

“The market will start absorbing such reverse repos and will not react much going ahead, like we are seeing today,” a trader with a private bank said.

India’s weighted average interbank call money rate as well as weighted average tri-party repo rate eased on Monday, with the latter moving below the RBI’s standing deposit facility rate of 5.25%. The facility acts as a floor for the monetary policy corridor.

Meanwhile, India’s annual retail inflation slowed to a more than six-year low of 2.10% in June, lower than the 2.5% estimated by economists in a Reuters poll and the 2.82% reading in May.

This has led to economists trimming down their full-year inflation forecasts and expecting at least one more rate cut.

Core inflation, which excludes volatile items such as food and energy and is an indicator of domestic demand, however, accelerated to 4.4%-4.5% in June, from 4.17%-4.20% in May, according to economists.

India’s overnight index swap rates were little changed with traders awaiting U.S. inflation data.

The one-year OIS rate was at 5.54% and the two-year OIS rate was at 5.53%. The liquid five-year was at 5.71%. ($1 = 85.9290 Indian rupees) (Reporting by Dharamraj Dhutia)