India Bonds Rally On RBI's 'Shock-And-Awe' Cash-Injection Plan

Indian bonds rallied the most in nearly nine months on Wednesday after the central bank announced fresh measures to boost banking-system liquidity, including government bond purchases and a foreign-exchange swap.

The Reserve Bank of India said Tuesday evening that it will buy 2 trillion rupees ($22 billion) of bonds in four tranches over December and January and hold a $10 billion foreign-exchange swap next month. The benchmark 10-year yield fell nine basis points, the most since April 2, to close at 6.54%. 

The measures are aimed to “shock-and-awe” market sentiment, said Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management Ltd. Analysts and traders, including those at RBL Bank Ltd. and ICICI Securities Primary Dealership Ltd., now see scope for the 10-year yield to fall toward 6.50%. 

The planned infusion is double the liquidity injection announced earlier this month and is expected to offset cash drain from the RBI’s dollar sales to support the rupee, Asia’s worst-performing currency this year. The measures follow a surge in the benchmark yield to a nine-month high earlier this week.

The latest measure adds to the central bank’s efforts to keep borrowing costs stable and ensure economic growth remains resilient amid punitive US tariffs. Lenders’ overnight borrowing costs rose sharply this week as liquidity tightened following tax outflows and the RBI’s dollar sales to shore up the rupee.

Liquidity was in a deficit of 761 billion rupees as of Dec. 23, the highest shortfall since Mar. 25, according to a Bloomberg Economics index

Wednesday’s rally follows a period of strain for the bond market, driven by concerns over a potentially sharp rise in state debt supply. Also supporting the gains was data released after trading ended Tuesday, which showed that a category of market participants including the RBI bought 47.4 billion rupees of notes, the most since Nov. 11.