By Subhadip Sircar


Shorter-tenor sovereign notes led declines in the Indian debt market for the third straight session as muddied outlook on rate cuts by the central bank and tepid demand at an auction for the securities eroded traders’ sentiments.

The yield on the 5.22% 2025 bond is up 4 basis points to 5.15% on Monday. The security has surged 17 basis points since the Reserve Bank of India held rates Thursday, while the 6.18% 2024 bond has risen 13 basis points. In comparison, the yield on the most-traded 5.79% 2030 bond is up only seven basis points.

The short-end trade had been crowded in India recently as traders pinned their hopes on more rate cuts to support an economy set for its first contraction in four decades. Despite the system being flush with cash, the longer end has been beset by worries over how the central bank will manage the government’s record borrowing program.

“RBI’s invisible hand has been missing for some time, and those expecting some bond support at the just-gone policy were disappointed,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. in Mumbai. “The somewhat sharper sell-off at the shorter end may have reflected heavier market positions there as well as the surprisingly tepid demand in the auction on Friday.”

Guessing Game

While the central bank’s pause Thursday didn’t surprise traders, its inflation outlook has left them guessing on the timing of the next rate cut. The RBI in its statement said the inflation outcome remains uncertain and it will use its policy space judiciously. The central bank also desisted from announcing any measures to support bonds.

As a result, Friday’s weekly debt sale saw higher-than-expected cutoff yields, especially at the shorter end.

“The RBI disappointed fixed income markets last week by leaving the repo rate unchanged and raising the bar for additional easing,” according to a note from Barclays Bank Plc. “Position readjustments could push OIS rates and short-tenor government bond yields higher in the near term.”

Barclays still sees modest upside in 3-5 year debt segments led by attractive carry and roll in shorter tenors and abundant liquidity, according to the note.