Bonds rallied on Thursday as the yield on the 10-year benchmark gilts on Thursday dropped two basis points to 8.79%, its lowest level in more than two weeks following the central bank’s R10,000-crore open-market operations.
However, liquidity remains tight and way above the RBI’s comfort level. The daily average borrowing through RBI’s liquidity adjustment facility (LAF) surged to R1.24 lakh crore this week, way higher than the desired level of R55,000 crore. On Thursday, bank’s borrowed R1.13 lakh crore through LAF.
The Reserve Bank of India (RBI) purchased R9,435 crore worth of bonds through an OMO on Thursday in a bid to boost liquidity.
The RBI bought R649 crore of 7.99% 2017 bonds at a maximum yield of 8.7699, R229 crore of 7.83% 2018 bonds at 8.7863%, R3,800 crore of 7.80% bonds due 2021 at 8.8163% and R2,700 crore of 8.13% 2022 at 8.8562%. Banks offered a total of R21,391.960 crore in the OMO, but the RBI accepted only R9,435 crore.
According to treasurers, supply of new paper, tight liquidity and bond buyback are the factors that are dominating the bond market currently. Said J Moses Harding, EVP, IndusInd Bank: ?The yields will come down whenever the central bank announces OMOs, while they could rise ahead of the bond auction.? Harding expects the yields to remain in a range in the 8.75-8.90% range.
Said K Eshwar, treasurer at Central Bank of India, said, ?RBI doesn’t want liquidity to be under pressure. It might announce more buybacks.? Eshwar believes yields could soften to 8.6-8.65% levels if the central bank announces more market-friendly moves.
Meanwhile, the auction of the enhanced foreign institutional investor limits in government and corporate debt on November 30 is likely to ease further pressure on yields. The government has raised the ceiling on FII investment in government and corporate debt by $5 billion each.