Bond yields crept up on Wednesday, as inflationary and liquidity-related concerns severely dented market sentiment. Also, the central bank declared higher-than expected cut-offs for treasury bill auctions conducted on Wednesday, which added to the bearishness in the bond market.
Yield on the 10-year benchmark bond ended the day at 8.37%, rising from Tuesdays close of 8.33%. Market participants are wary of taking up new positions, with inflation expected to cross 9.7% in the coming weeks. The market is now expecting further moves from the Reserve Bank of India (RBI), especially after all signals seem to be pointing at high inflationary figures, said a senior official at a bond house.
Cash conditions have also been under strain, with advance tax payments by corporates set to suck out up up to Rs 9,000 crore from the system. RBI also auctioned Rs 3,000-crore treasury bills of two separate tenures on Wednesday.
A yield-to-maturity of 8.06% was declared on the 91-day T-bill while a yield of 7.84% was declared on the 364-day bill; both of which were above market expectations. RBI will auction Rs 6,000-crore government securities on Friday.
Meanwhile, the rupee remained range-bound, with thin traded volumes. The rupee ended the day at 42.89/90 against the dollar, a notch below its previous close of 42.88/89.
According to market sources, there was very subdued demand for dollars since oil companies are virtually absent from the market. Last week, RBI had started selling dollars directly to oil companies in exchange for oil bonds.
The demand has been curtailed and there was hardly any supply, said a trader with a private bank. Also, the central bank was seen intervening in the market at lower levels, in the form of nationalised banks selling dollars. Also, foreign banks buying dollars in at higher levels kept the rupee in a tight range.
Foreign banks buy dollars at the spot market and simultaneously sell them at the offshore NDF market in an attempt to arbitrage the price differential. Banks borrowed funds worth Rs 6,270 crore from RBI through repo operations of its liquidity adjustment facility.