By Dharamraj Dhutia
MUMBAI (Reuters) -The Reserve Bank of India will meet select primary dealers and banks on Tuesday, three traders aware of the developments told Reuters, amid concerns that tightening liquidity in the banking system is pressuring the government bond market.
The meeting, though without a formal agenda, is expected to focus on current market conditions, the traders said, declining to be named as they are not authorized to speak to the media.
The RBI on Friday canceled an auction of 110 billion rupees ($1.25 billion) in seven-year government securities, triggering a seven-basis-point drop in the benchmark bond yield.
“Things have changed sharply within a few days, and what we had thought would be a continued bull-run turned out to be a short-lived phenomenon, which must be worrying for them and could have led to Friday’s auction cancellation,” one of the traders said.
All the traders said the central bank may be concerned about prevailing yield levels. The RBI did not respond to a Reuters email seeking comment.
Banking system liquidity has fluctuated between surplus and deficit over the past two weeks, affecting bond market sentiment.
“The RBI definitely feels yields should be lower than what they currently are, and they had also taken steps like tweaking the supply calendar and convincing states to borrow less,” a second source said.
RBI Governor Sanjay Malhotra last month noted there is room for bond yields to decline.
“A number of measures have been contemplated in this regard, including how the primary G-Sec auctions will be held. The tenor of these government offerings, not only central government but also state government,” Malhotra said.
($1 = 87.8950 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)
