"Domestic yields are taking cues from global yields and risk aversion in financial markets," said VRC Reddy, treasury head of Karur Vysya Bank. Yields opened lower earlier in the day mirroring a drop in U.S. peers after problems at Swiss banking giant Credit Suisse stoked fears about the impact of rising yields on the global banking sector. Issues at the European bank after the Silicon Valley Bank's collapse last week have raised bets that the Fed may pause its rate hike cycle. The U.S. central bank's policy decision is due Wednesday. Fed funds futures are pricing in over 65% chance for a 25 basis point hike in March and 33% for rates being left unchanged. The Fed's decision will also help investors determine the future course of rate action by the Reserve Bank of India next month, dealers said. India's headline retail inflation was at 6.44% in February, above the central bank's target for the second consecutive month, increasing bets of another rate hike in April. "Impending liquidity tightness due to tax outflows and banks' inclination for adjustment of duration of portfolio is likely to negate the sharp fall in yields, and the benchmark yield is expected to trade in the 7.32%-7.38% range in near term," Reddy said.
India's banking system liquidity slipped into a deficit after advance tax outflows, leading to a rise in overnight rates.
Meanwhile, the government bond yield curve is likely to
steepen in the new financial year, with longer-end yields rising
due to heavy supply and the shorter-end falling amid the global
repricing of rate hike bets, analysts said.
(Reporting by Bhakti Tambe and Dharamraj Dhutia; Editing by
Sohini Goswami)
