Bond yields steady as absence of CRR cut increases OMO bets

Bond market participants are not overly miffed with the absence of a cut in the cash reserve ratio as a wait of around six weeks could deliver a big rate cut besides bond purchases under open market operations (OMOs) until then.

Most market participants expect yields to move south again after the brief rise as rate cut expectations start building up towards January 29, when the central bank will release its third-quarter review.

The 10-year benchmark 8.15%, 2022 bond is likely to be stuck in a narrow band of 8.15-8.18% until then, bond traders said.

?It is a good thing CRR cut didn?t come, now the anticipation of sequential OMOs are building up. Plus, there could be a rate cut in January,? said Pradeep Madhav, head of STCI Primary Dealership.

In the review, RBI said the trend in inflation has reinforced the likelihood of a rate cut in January. The central bank also said the policy stance has shifted towards supporting growth.

Bond yields, that had eased by 2 basis points over the last two days on hopes of a cut in both repo rate and CRR, inched up albeit marginally after the central bank kept both the monetary tools unchanged.

Madhav said bond yields could start easing in January as traders start pricing in a rate cut. RBI will detail its third quarter review on January 29.

?I think closer to the December inflation number, you could see a rally in the bond market as expectations start building up for a rate cut,? said Arun Khurana, head of global markets at IndusInd Bank. Khurana expects the 10-year bond yield to ease to 8.10% in January.

OMO hopes build

Bond traders say in the absence of CRR cut, the frequency of bond purchases under OMO may increase. ?Had RBI cut CRR, the market would have sold off as that would mean no OMOs,? said a bond trader at a foreign bank.

?I think the OMOs may be coming along pretty frequently now,? said Khurana.

The central bank has resumed bond purchases under OMOs since December after a gap of five months as liquidity deficit moved beyond the stated comfort level of 1% of bank deposits. It has bought bonds worth R23,000 crore in December so far.

On the sidelines of an event after the release of the policy, deputy governor Subir Gokarn said the liquidity tightness being transient in nature, a more permanent infusion through CRR cut was not warranted at this time. ?LAF borrowings are largely because of the build up of government cash balances and advance tax collections,? Gokarn said.

Banks? borrowings from the repo tender touched a nine-month high of Rs 1.5 lakh crore on Monday. Traders said the RBI could conduct at least 2-3 OMO auctions, wherein it buys bonds worth around R20,000-30,000 crore more to ease the transient liquidity stress.