MUMBAI - Indian government bond yields ended lower on Monday amid expectations that the central bank's move to withdraw highest value currency notes would push up liquidity, and improved appetite for fixed-income assets.
The 10-year benchmark 7.26% 2033 bond yield ended at 6.9864% after closing at 7.0106% on Friday. The three-year to five-year bond yields ended lower by around seven basis points.
"The move will impact the shorter end of the curve favourably and securities up to five years may perform better," said Ritesh Bhusari, deputy general manager for treasury at private sector lender South Indian Bank. "The long-end has already posted a decent rally and term premium is less lucrative."
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 of March 2023.
The central bank's decision is likely to improve banking system liquidity, bringing down recently elevated short-term rates, analysts and bankers said.
On a net basis, it is likely that deposits would increase by 1.5 trillion rupees to 2 trillion rupees and durable liquidity could increase by around one trillion rupees, Kotak Mahindra Bank said.
Even though India's banking system liquidity had remained at a surplus of around 600 billion rupees in May, overnight rates remained elevated for the most part of the month as bulk of the surplus was with a few large banks.
Traders also said, liquidity will improve after the RBI approved a surplus transfer of 874.16 billion rupees to the government for the last fiscal year, which could flow into the banking system in the form of government spending.
The improvement in liquidity could push the shorter duration bond yields downwards, but long-end yields may rise over the medium term with much-anticipated open market bond purchases as well as domestic policy easing getting delayed, traders said.
The fall in longer-duration bond yields was also capped, amid constantly rising U.S. peers. The 10-year U.S. yield jumped 25 basis points in the last six sessions and was trading around 3.65%.
($1 = 81.7800 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Eileen Soreng;)