Optimism returned to the bond markets on Thursday, following the government?s move to raise the ceiling for foreign institutional investor (FII) investment in gilts to $15 billion, from the $10 billion currently, and the Reserve Bank of India?s decision to conduct open market operations (OMO).
The yield on benchmark 10-year bond dropped more than 10 basis points during the day though the rally was short- lived with caution taking over ahead of Friday’s auction of government securities. The benchmark 8.79%, 2021 bond on Thursday finally ended down eight basis points to 8.81%, its lowest close since October 27, 2011.
On Wednesday, the RBI said it would conduct OMOs to buy back bonds worth R10,000 crore on November 24. On Thursday, the government upped the FII ceiling for invetsments in gilts and corporate debt and corporate debt by $5 billion to $15 billion and $45 billion, respectively.
Experts say the course of bond yields will be determined by the success of the OMO and the outcome of Friday’s auction.
?The trend will depend on which securities are chosen for OMO and whether market rates are accepted, ? said Mohan Shenoi, head of treasury at Kotak Mahindra Bank, adding that the optimism might last if the RBI buys back more securities.
ADM Chavali, head-treasury, Bank of Baroda, added that the OMO will only be successful if yields offered are attractive enough to tempt banks to offer their securities. ?Banks won’t book a loss. So, the yields offered by the central bank have to be attractive,? he said.
? The last few auctions didn’t go through smoothly because the cut-off yields were very high. That is what prompted the central bank to announce an OMO,? said K Eshwar, GM-Treasuer, Central Bank of India. Three of the four auctions conducted so far in the second half of 2011-12 have seen devolvement, while the central bank had to cancel R4,000 crore worth of auction last week as the yields quoted by market players were high.
Bond dealers said a clear trend will emerge after the Friday’s auction where the government will raise R13,000 crore by selling bonds due in 2018, 2021 and 2027.
Meanwhile, ahead of the reporting day for the banks, the amount borrowed through the central bank’s liquidity adjustment facility continued to remain high. Bank’s borrowed R91,855 crore through the RBI’s repo window on Thursday.
The average daily amount borrowed by bank’s this fortnight is R1.04 lakh crore, much higher than the desired R56,000 crore. Treasurers attribute high borrowings to pick up in the credit offtake.