India short-term notes may slip as RBI moves to withdraw more liquidity

India's 10-year government bonds are likely to be barely changed in early deals on Wednesday, but up to five-year bonds may dip after the central bank announced another variable rate reverse repo to withdraw liquidity from the banking system.

The yield on the benchmark 10-year bond (IN063335G=CC) is expected to trade between 6.30% and 6.32%, a trader at a private bank said, after closing at 6.3053% on Tuesday. The five-year 6.75% 2029 bond (IN067529G=CC) ended at 5.9569%.

"Market was not expecting the central bank to move to shorter tenor reverse repo so soon, and we could see some impact in treasury bills to up to five-year papers," the trader said.

The Reserve Bank of India will conduct a two-day reverse repo worth 1 trillion rupees ($11.66 billion) later in the day.

On July 4, the central bank's seven-day reverse repo withdrew 1 trillion rupees from the banking system.

Daily average liquidity surplus has stood at around 3.85 trillion rupees so far this month, which is over 1.5% of total deposits in the banking system.

In April, Governor Sanjay Malhotra had said the RBI aims to keep surplus at around 1% of banks' deposits.

The weighted average interbank call money rate has stayed at the floor of the policy corrido. The tri-party repo rate has stayed comfortably below 5.25%, which is the standing deposit facility rate and acts as the floor of the policy corridor.

Meanwhile, the 10-year U.S. Treasury yield remained elevated as President Donald Trump broadened his global trade war by announcing a 50% tariff on copper and said long-threatened levies on semiconductors and pharmaceuticals were coming.

RATES

India's short-term overnight index swap rates may see paying pressure after the latest central bank's move, while the long-end may remain largely unchanged.

The one-year (INR1YMIBROIS=CC) OIS rate ended at 5.52% and the two-year OIS rate (INR2YMIBROIS=CC) at 5.50%. The liquid five-year (INR5YMIBROIS=CC) finished at 5.71%.

KEY INDICATORS:

** Brent crude futures BRN1! fell 0.2% to $70 per barrel after rising 0.8% in the previous session

** Ten-year U.S. Treasury yield US10Y at 4.4112%; two-year yield (US2YT=RR) at 3.9010%

** The RBI will auction treasury bills worth 200 billion rupees

** RBI to conduct two-day variable rate reverse repo auction worth 1 trillion rupees

($1 = 85.7430 Indian rupees)