India's 10-year benchmark eased to 6.65%, close to a three-year low, after the Reserve Bank of India announced a slew of measures to ease tight liquidity conditions in the financial system.

"Even the corporate bond yields eased three to five basis points across the curve following RBI's liquidity boosting move," a DCM banker said.

The central bank said it will hold open market operations for up to Rs600bn (US$6.93bn) in three tranches of Rs200bn each on January 30, February 13 and February 20.

It will hold a 56-day variable rate repo (VRR) auction, where the banks borrow short-term funds, for Rs500bn on February 7 and a dollar/rupee buy/sell swap auction of US$5bn for a tenor of six months on January 31.

"This response is likely to be perceived by the markets as RBI swinging into multi-pronged action on the liquidity front rather than ad-hoc support," Radhika Rao, economist at DBS Research, wrote in a note. "Persistent unsterilised dollar sales to defend the currency as well as seasonal drivers had magnified the liquidity squeeze, with the deficit widening sharply to Rs3trn in recent sessions. Expectations were that this deficit would have persisted (and further widened) this quarter, which is also a fiscal year-end."

RBI will inject liquidity into the system in the range of Rs500bn to Rs2trn through these measures, depending on the requirement, Barclays said in a note today.

Some economists feel that India's central bank may relax monetary policy at its February 7 meeting following the government's budget announcement on Saturday for the fiscal year starting on April 1.

"By announcing these measures to address liquidity concerns, the RBI, in our view, is setting stage for monetary easing in the upcoming February policy meeting," Barclays wrote.

The RBI did an open market operation of over Rs100bn on January 17 and also announced measures to use the rupee for settlement of cross-border transactions through liberalisation of foreign exchange management (FEMA) regulations to ease the pressure on the currency.

The US dollar has gained 3.3% against the rupee in the past six months and 1.1% since the beginning of the year. It rose as high as Rs86.6460 on January 13 and was trading at Rs86.5220 today.

Source: IFR India's bond yields ease after RBI's liquidity measures | IFR