10-year yield at near one-year low post record RBI surplus dividend transfer to govt

Earlier in the day, bonds traded largely sideways as markets awaited the government's next step

Indian government bond yields declined on Wednesday, with the benchmark 10-year yield closing at a near one-year low after the central bank approved a record surplus transfer to the government, improving demand.

The 10-year yield ended at 6.9919%, its lowest since June 7, 2023, following its previous close of 7.0351%.

The 7.18% 2033 bond yield ended at 7.0371%, after ending at 7.0783% on Tuesday. Indian debt markets are shut on Thursday for a local holiday.

"Bonds have reacted positively as the higher dividend has the capacity to negate any possible negative impact from elections on government borrowing, and the 10-year yield should move further below 7% soon," said Alok Singh, group head of treasury at CSB Bank.

The Reserve Bank of India's board approved the transfer of a record 2.11 trillion rupees ($25.35 billion) as surplus to government for the fiscal year that ended in March.

The amount was sharply higher than 874.16 billion rupees in the previous year and market estimates of between 750 billion rupees to 1.2 trillion rupees.

As per the interim budget, the government had budgeted for a dividend of 1.02 trillion rupees from the central bank, state-run banks and other financial institutions.

Earlier in the day, bonds traded largely sideways as markets awaited the government's next step after third consecutive attempt to infuse liquidity via buyback of debt was undersubscribed this week.

The government is open to buying back more bonds and cut borrowings through Treasury bills as part of its short-term cash management, a source familiar with the matter said on Tuesday.

Two other sources said spending was likely to remain slow until about August, when the new government settles in. The government has already slashed the supply of T-bills by 600 billion rupees till end of June.

Meanwhile, the 10-year U.S. bond yield stayed above 4.40%, as investors awaited the minutes from the Federal Reserve's latest policy meeting due later in the day for fresh clues on interest rates.