The 10-year benchmark 7.26% 2033 bond yield is expected to be in the 6.95% to 7.01% range after closing at 7.0106% in the previous session. The yield ended higher on a weekly basis last week, after easing in the previous four. This comes as a major surprise and for the time being, the money should flow into government securities, which will act as a major positive, the trader said. “However, a large 2016-type rally may not be seen, as the quantum is sharply lower as compared to that period.”
On Friday, the Reserve Bank of India said it would withdraw its highest denomination 2,000 rupee note from circulation, whose value has declined to 3.62 trillion rupees ($44.27 billion), as on March 2023. Market participants have said the withdrawal would lead to an increase in banking system liquidity, which could ultimately flow into debt investments, mainly in the shorter tenor papers.
“Core liquidity is expected to rise substantially by September 2023 due to lower currency leakage. In the second half of fiscal 2024, core liquidity is expected to reduce as currency leakage picks-up pace, opening-up space for durable infusion of liquidity by RBI by end of FY24 (if needed),” Gaura Sengupta, India economist at IDFC First Bank said.
Last week, the RBI approved a surplus transfer of 874.16 billion rupees to the government for the fiscal year ended March, which was higher than the previous year but lower than market expectations.
Meanwhile, constantly rising U.S. yields may limit the fall in longer duration local bond yields. U.S. yields rose after the recent commentary from Federal Reserve officials that inflation did not appear to be cooling fast enough to allow the Fed to hit a pause in its rate-hiking campaign.