RBI's Cash-Drain Operation Falls Short, Bond Yields Remain Muted

India's government bonds remained muted on Monday after a technical glitch led to lower-than-anticipated interest for the Reserve Bank of India's (RBI) cash-drain operation. The central bank initiated a 30-day variable rate reverse repo operation aimed at curbing liquidity in the banking system, but received offers worth only 2.59 trillion rupees.

The RBI followed up with another overnight auction for 5 trillion rupees, which will allow banks to park excess funds from large diaspora deposits. Markets are fearing that the central bank may take tougher measures to absorb surplus banking liquidity if the responses to reverse repos is not strong.

India's benchmark 6.94% 2036 bond yield was 6.9643% at 11:15 a.m. IST, versus 6.9625% at Friday's close. The sheer quantum of rupee liquidity generated has resulted in a sharp de facto easing of interest rates, according to J.P. Morgan.

Rising oil prices and U.S. and domestic rate bets have kept traders cautious, with Brent crude rising 0.8% to $97 a barrel in Asian trade.