Indian government bond yields are anticipated to rise on Wednesday, particularly for shorter-duration bonds, following the Reserve Bank of India's (RBI) announcement of a reverse repo auction to manage liquidity.

According to a trader at a private bank, the yield on the benchmark 10-year bond is expected to fluctuate between 6.26% and 6.29% after closing at 6.2504% in the previous session. The five-year 6.75% 2029 bond concluded at 5.9870%. The RBI utilizes repo and reverse repo operations to manage liquidity, injecting funds through repo auctions and withdrawing them through reverse repo auctions.

The RBI plans to conduct a seven-day variable rate reverse repo auction worth one trillion rupees ($11.6 billion) on June 27. The banking system's liquidity surplus in India has averaged 2.76 trillion rupees per day in June, exceeding 1% of bank deposits. It had been reported earlier in June that the RBI might initiate variable rate reverse repo auctions to absorb excess liquidity as needed.

While shorter-duration bonds are likely to be more affected by this measure, longer-duration bonds may find support from lower oil prices and declining U.S. Treasury yields. The 10-year U.S. bond yield stood at 4.30% after reaching a seven-week low on Tuesday, fueled by weaker-than-expected consumer confidence data that bolstered expectations of a near-term rate cut. Brent crude oil was trading below $70 per barrel after Iran and Israel agreed to a ceasefire.

The overnight index swap (OIS) rates for shorter durations in India are expected to experience upward pressure, while the longer end is expected to remain stable. The one-year OIS rate was at 5.49%, and the two-year OIS rate was at 5.47%. The liquid five-year OIS ended at 5.6725%.

This move by the RBI to withdraw liquidity is seen as a step to manage the excess funds in the banking system, which could help to control inflation and maintain financial stability. However, it is also expected to put upward pressure on short-term interest rates, which could impact borrowing costs for businesses and consumers. The market will be closely watching the outcome of the reverse repo auction and the RBI's future actions to gauge the overall impact on bond yields and the broader economy.