RBI resorted to OMO to check liquidity-driven rally: I-Sec

Our Banking Bureau

Mumbai, Dec 10: The latest open market operations (OMO) was a move to check another liquidity-driven rally in the long-end bonds, as further easing from the yield-levels prevailing prior to the OMO announcement would have been completely out-of-sync with the short-term rates, according to ICICI Securities mark-to-market for the week ending December 15.

I-Sec said a reduction in repo rate is unlikely in the near-term. At the same time, it cannot be constructed as a signal of reversal in RBI’s stance or a harbinger of upward trend in interest rates. For this, there has to be a fundamental re-assessment of economic conditions, which appears unwarranted by the economic data.

During the week, gilts market saw rapidly fluctuating fortunes as it grappled with a slightly unexpected auction, an even more unexpected OMO and numerous interpretations of RBI’s actions. Over the last few days, both the slide in prices and the subsequent recovery has been anything but linear and the intra-day movements were very sharp.

At the start of the week, the long-end bonds moved up by 75-100 paise on the back of comfortable liquidity and continued bullish sentiment.

The 10-year benchmark (11.50 per cent, 2011) had touched a high of Rs 125.60 (7.76 per cent YTM), last Monday, before correcting by 25-30 paise on the auction announcement. Market-sentiment, however, turned negative after the OMO announcement on Thursday.

The OMO was seen as a punishing move of the central bank and triggered a sharp fall of around Rs 3.50 in the long-end prices, with the 10-year benchmark touching a low of Rs 122.10. Prices recovered by 60-100 paise since then.