India’s short-dated bonds rallied on Friday, May 22, after the Reserve Bank of India decided to withdraw 2,000-rupee ($24) notes from circulation.
The 5-year yield fell about 8 basis points to 6.88%, and the 10-year yield fell about 3 basis points to 6.98%.
The Ujjivan Small Finance Bank treasurer said the rebound was more of a short term as it depended on how long liquidity lasted.
For 5-year maturities and shorter (bonds), the rally now looks sustainable unless the RBI steps in and starts pulling liquidity.
The current short-term government bond yield may further fall by about 10 basis points. Economists at Kotak Mahindra Bank said the withdrawal of Rs 2,000 notes should ease liquidity in the banking system.
Even when partial exchange of small denomination notes occurs, there will be some idle notes left in the bank. This should ease money market rates in the short term.