The government bond yields were unmoved for the seventh straight trading day on Tuesday as dealers continued to stay cautious ahead of the GDP data expected on Thursday. Moreover, there was some uncertainty over the Reserve Bank of India?s (RBI) bond purchases via open market operations (OMOs). The yield on the 10-year benchmark ended the session at 8.5%.
Expectations of more bond purchases by the RBI via OMO have been building since the persistent pressure on the rupee could necessitate intervention. Bond buys could be needed to offset the stress on liquidity, dealers said. The rupee weakened by 49 paise on Tuesday to end at 55.67/$1. The rupee depreciated ON Tuesday to end at 55.67/$1, snapping a two-day rise as oil companies scrambled for dollars to meet their month-end demand. The RBI was said to be largely absent from the forex market on Tuesday. Treasury officials expect the RBI to continue with its bond purchases through OMOs but are unsure of the quantum and frequency.
?Definitely OMOs will remain an option with the RBI because liquidity is under stress,? said Ashish Parthasarthy, head of treasury at HDFC Bank. Parthasarthy expects bond yields to stay in a tight band until Thursday.
The RBI has bought bonds through OMO auctions for the last three consecutive weeks. In total, the central bank has infused more than R32,000 crore. Liquidity has improved as reflected in the fall in banks? repo borrowings since Monday. Borrowings from the RBI?s repo tender have fallen below the R1 lakh crore mark this week.
Even as the improved liquidity and expectations of a weak GDP data has spurred receiving in interest rate swaps, bond yields have been unchanged and are likely to remain so for the rest of the week.
?People are not willing to take positions because of the uncertainty over OMO and also as people want to wait for GDP data,? said a senior bond dealer at a large private bank.
The central bank had intervened in the forex market in past weeks to stem the currency?s fall by selling dollars and this has sucked out rupee liquidity from the banking system. Consequently, banks have been borrowing more than R1 lakh crore from the repo tenders of the RBI in the last one week. However, since Monday banks? borrowings from the repo tender have fallen sharply.
The timing of OMO will depend on to what extent the RBI has intervened in the forex market and therefore sucked out rupee liquidity, Parthasarthy said.