Bond yields rise after Fed rate cut

MUMBAI: Government bond yields rose on Thursday as traders expected a cut in US interest rates to boost the rupee, which may lead to the RBI issuing extra debt to absorb funds released by any currency intervention.

At 10:00 am, the 10-year federal bond yield was at 7.86 per cent, up from the previous close of 7.84 per cent. The US Federal Reserve cut its federal funds rate by 25 basis points to 4.5 per cent on Wednesday.

That could trigger a fresh wave of capital inflows into Indian shares and push the rupee higher, as happened after the Fed cut rates in September, raising the prospect of the central bank buying dollars to check the currency's rise.

"Cash is a big concern," a foreign bank trader said. "On bonds, we see a reversal of the recent steepening of the yield curve. The unpredictability of liquidity balances and fears of RBI action will hold up short-term rates," ICICI Securities said in a research note.

On Tuesday, the Indian central bank said it was raising banks' cash reserve requirements by 50 basis points to 7.50 per cent. The move, which takes effect on November 10, will drain Rs 16,000 crore ($4.1 billion) from the banking system.

It left interest rates unchanged in its policy review. Traders said fresh supplies also weighed on sentiment. The central bank will auction Rs 6,000 crore of market stabilisation scheme (MSS) bonds on Thursday.

The Reserve Bank of India (RBI) rejected bids of Rs 5,000 crore in the weekly T-bill auction on Wednesday, which helped yields fall towards the close. Traders said they would watch oil prices, which are a risk for inflation.