1. Excessive liquidity, rate cut hopes defend yields against global rout, oversupply

Excessive liquidity, rate cut hopes defend yields against global rout, oversupply

Despite the global bond rout and fresh supply of government securities to the tune of Rs 28,000 crore this week, the benchmark government bond yield closed at 6.53% on Friday — just two basis points higher than the closing level last Friday.

By: | Mumbai | Published: July 8, 2017 3:52 AM
government bond, government bond india, indian government bond, rbi, rbi on government bond, reserve bank of india As Soumyajit Niyogi, associate director, core analytical group at India Ratings and Research, points out, there is excessive liquidity in the system as of now without any major credit offtake. (Reuters)

Despite the global bond rout and fresh supply of government securities to the tune of Rs 28,000 crore this week, the benchmark government bond yield closed at 6.53% on Friday — just two basis points higher than the closing level last Friday. However, another OMO (open market operations) sale announcement by the Reserve Bank of India (RBI) on Friday to the tune of Rs 10,000 crore might not go down well with the market in the coming week, according to dealers in top banks. The central bank has announced it will conduct OMO sale on July 20. It had just concluded an OMO sale worth Rs 10,000 crore early this week. Treasurers indicated that when the RBI commences an OMO sale, it is usually done in a sequential manner till the desired results are achieved. “We expect a total of Rs 40,000 crore of OMO sales including the one that has already been conducted,” said a senior G-Sec dealer. OMO sales are typically conducted to suck out the excessive liquidity from the system while OMO purchases are done to infuse liquidity into the system.

Excessive liquidity in the system to the tune of around Rs 3.5 lakh crore and increasing expectation of a rate cut in the upcoming monetary policy defended the yields this week. The sentiments provided support to such an extent that a global sell-off led by an ECB statement and a supply of Rs 28,000 crore of central government securities this week — Rs 10,000 crore OMO sale and Rs 18,000 crore auction — could not take the yields higher than two basis points compared to last week’s closing.

As Soumyajit Niyogi, associate director, core analytical group at India Ratings and Research, points out, there is excessive liquidity in the system as of now without any major credit offtake. “A major portion of the market expects a rate cut in the upcoming monetary policy. As a result, yield on the benchmark government bonds are still at softer levels and not showing any signs of further hardening,” Niyogi said.

Interestingly, even some amount of selling by foreign portfolio investors (FPIs) did not have much effect on the yields this week. FPIs had sold a net $216.32 million of Indian debt. “The yield on the benchmark might rise by another 5 basis points on Monday. But we can definitely expect the yield to remain below 6.60%,” said a bond market expert.

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