Indian bond traders searched for directional cues in early trade on Tuesday, as elevated oil prices weighed on underlying sentiment, with focus on the central bank's liquidity actions.
The Reserve Bank of India has announced several reverse repo operations to withdraw liquidity from the banking system, after the surplus hit a record high over the weekend.
A prolonged liquidity glut can make monetary conditions looser than intended, potentially fuelling inflationary pressures and lifting prices of financial assets.
"By continuing to absorb liquidity, the RBI is signalling that it does not want the record cash surplus to dilute monetary tightening," a trader with a state-run bank said.
"The immediate aim is to keep overnight rates anchored, but elevated crude prices mean the central bank's inflation challenge is becoming more complicated."
The liquidity-management operations come as the RBI has signalled a more cautious policy stance. Last month, the central bank indicated that interest-rate increases could be approaching as inflation risks persist and domestic growth remains resilient.
The yield on India's benchmark 6.94% 2036 bond was at 6.9611% as of 10:00 a.m. IST, after closing at 6.9607% in the previous session.
The RBI will conduct an overnight variable rate reverse repo auction worth 5 trillion rupees ($52.82 billion) on Tuesday, after withdrawing 2.59 trillion rupees through a 30-day reverse repo, which had an option of early redemption, a day earlier.
The liquidity surplus is driven in part by sizeable inflows into diaspora deposits.
External pressures could also worsen the inflation outlook, as the benchmark Brent crude contract trades above $97 per barrel after renewed military escalation between the U.S. and Iran.
India imports nearly 85% of its crude needs and a sustained increase in energy costs could impact inflation and government finances.
RATES
India's overnight indexed swaps were also muted.
The one-year rate was at 5.9750%, while the two-year rate was at 6.17%. The five-year rate remained around 6.47%.
