The bond markets sold off on Monday with the benchmark 10-year yield surging 10 basis points as the Reserve Bank of India (RBI) unexpectedly left key policy rates as also the Cash Reserve Ratio (CRR) unchanged. Traders got a nasty surprise with the RBI’s status quo on monetary policy, having expected at least a 25 basis points cut in the repo rate.
The yield on the deemed 10-year benchmark 8.15%, 2022, bond jumped 10 bps to 8.15% from 8.05% before the release of the policy. The current benchmark 8.79%, 2021 bond yield also rose 13 bps to 8.47% following the announcement.
Most treasurers expect bond yields to remain at the current levels and don?t see them hardening too much. Indeed, the RBI’s statement that it would continue with its bond purchases under open market operations (OMO) may prevent any further rise in yields and even bring them down a bit, dealers said.
?Given their commitment on OMOs and liquidity, I think bond yields could come off a bit going forward,? said Hitendra Dave, head of global markets, HSBC Bank.
Dave added that the rise in bond yields was expected as most bond traders had priced in a cut in the repo rate. ?I think the response would be muted by anticipation of the OMOs coming through. Therefore, there will be some amount of demand from the RBI that would suck out some of these bonds from the system. So, to that extent, capping the yields for the new bond at 8.14% seems to be a reasonable call in the absence of any rate cuts,? said Ananth Narayan G, regional global market head for South Asia at Standard Chartered Bank.
In the mid-quarter review, the central bank said that ?even as the liquidity situation converges to the comfort zone, the Reserve Bank will continue to use OMOs as and when warranted to contain liquidity pressures.?
The RBI’s OMO bond purchases infuse liquidity and also soak up part of the government borrowing, thereby reducing the bond supply in the market. Parthasarathy Mukherjee, head of treasury, Axis Bank, expects periodic bond purchases by the RBI to infuse liquidity.
The central bank has bought around R43,000 crore worth of bonds through OMO since May.
Bleak GDP growth of 5.3% for January-March and 6.5% for 2011-12 had fuelled expectations of a rate cut.
Bond yields had fallen over 20 bps in the last one month on hopes the RBI would cut policy rates due to a sharp slowdown in growth and industrial output. Traders said that with the mid-quarter review out of the way, the steady supply of bonds through auctions under the government borrowing programme and the RBI’s likely bond purchases under open market operations will determine yields going forward.
Out of the R3,17,000 crore that the government aims to raise through bond auctions during April-September, it has raised a little over R1,00,000 crore so far. More than R2,00,000 crore worth of bonds will be auctioned in the coming weeks.