Bond yields are likely to go south on Friday but treasurers rule out a big rally. There will be some amount of rally, but it may not be big. Market has been waiting for the OMO announcement and no one had ruled it out, said Ashish Parthasarthy, head of treasury at HDFC Bank.
Most traders expect the yield on the benchmark 10-year bond to slip by at least 2-3 basis points on Friday. The bond ended at 8.19% on Thursday. Government bonds have been stuck in a narrow band for over a month and yields had climbed in the last one week as liquidity tightness became severe.
Banks on an average borrowed R1 lakh crore daily from RBIs repo tender to meet shortfalls, indicating that tightness is beyond the RBI's stated comfort level of 1% of deposits. Deputy governor HR Khan said RBI is open to bond purchases as a tool to infuse liquidity should the tightness worsen.
In its policy review in October, RBI had said liquidity could worsen in coming months as banks' loan disbursals will pick up while deposit growth may continue to lag.
The timing of OMO was the only uncertain thing, but the fact that RBI will have to buy bonds was not debated at all in the bond market, said a bond trader at a foreign bank.
On December 4, RBI will buy 8.24%, 2018 bond, 8.19%, 2020 paper, 8.15%, 2022 bond and the 8.28%, 2027 bond through OMOs. These bonds are likely to gain the most in the coming days. Most bond traders expect more such OMO purchases to come during December as liquidity deficit is unlikely to reduce. Further advance tax outflows during mid of december will also put pressure on liquidity.