Indian government bonds stalled on Monday after a technical glitch led to lower-than-anticipated interest for a long-duration cash withdrawal operation, leading to the central bank announcing an overnight operation.
India's benchmark 6.94% 2036 bond yielded 6.9643% at 11:15 a.m. IST, versus 6.9625% at Friday's close.
Traders have been worried the central bank could take tougher measures to absorb surplus banking liquidity if the responses to reverse repos is not strong. India's banking liquidity surplus swelled to record 10.73 trillion rupees ($113.64 billion) on Friday.
"The sheer quantum of rupee liquidity generated has resulted in a sharp, de facto easing of interest rates and is at odds with the signal from the August MPC minutes that the RBI may need to hike rates in coming months," J.P. Morgan said in a note.
"The central bank will therefore have to aggressively sterilize these inflows."
The Reserve Bank of India received offers worth 2.59 trillion rupees for its 30-day variable reverse repo, and followed it up with another overnight auction for 5 trillion rupees.
The auctions will allow banks to park excess funds from large diaspora deposits.
"Markets are fearing sell/buy swaps, OMO (bond) sales or even a CRR (cash reserve ratio) hike by the RBI, any of which would reverse the positivity from RBI measures announced in June," a private-bank trader said.
Indian lenders had proposed foreign-exchange sell/buy swaps at a meeting with the RBI last week to drain excess rupee liquidity, which has depressed overnight call rates, undermining the tighter monetary conditions signalled in the RBI's August policy minutes.
Rising oil prices and U.S. and domestic rate bets have kept traders cautious. Brent crude rose 0.8% to $97 a barrel in Asian trade.
RATES
India's overnight indexed swaps reversed receiving bets after the auction result.
The one-year rate was flat at 5.99%, while the two-year rate inched lower to 6.18%. The five-year rate was little changed at 6.47%.
