The Reserve Bank of India (RBI) will repurchase securities worth Rs 10,000 crore in what will be the second tranche of total buyback operations of Rs 20,000 crore announced on June 16, 2010.

On Friday, the central bank bought back securities worth Rs 10,000 crore from banks. The move is aimed at injecting liquidity into the system at a time when money has moved out of banks on account of telecom companies having borrowed around Rs 45,000 crore to pay for 3G licences. Money has also flowed out of the system on account of advance tax payments. Further, those companies that have bid successfully for Broadband licences will need to pay around Rs 37,000 crore. Of course, the central bank continues to auction government bonds. On Friday, bonds worth Rs 11,000 crore were auctioned and there was a small devolvement of Rs 1,386 crore.

Indeed, anticipating some tightness in the money market, the central bank, had on May 26, 2010, said it would allow banks to maintain a lower Statutory Liquidity Ratio (SLR) of up to 0.5%, if they so needed and allowed them to sell securities through a special repo window. So far, banks have used the window regularly borrowing on an average of Rs 60,000 crore daily in the week to June 11. In the week to June 18, banks have borrowed an average of Rs 35,000 crore daily. The tightness in the money market has been seen more at the shorter end where interest rates on Comemrcial Paper(CP) with a maturity of one month have shot up by about 70-80 basis points over the last fortnight. In fact, CPs with shorter maturities are attracting higher coupon rates compared with paper of slightly longer maturities. The yield on the 10-year benchmark bond dropped by eight basis points on Friday to 7.56% while call rates shot up to 5.25%.

6.85% stock auction sees Rs 1.3k-cr devolvement

The auction of 6.85% government stock maturing in 2012 for an amount of Rs 6,000 crore by the Reserve Bank of India (RBI) saw devolvement of Rs 1,386 crore on Friday. However, the auction of 8.20% government bond maturing 2022 for Rs 5,000 crore was fully subscribed.

This is the second devolvement of any auction since RBI started government borrowing programme in April. Says S Srinivasa Raghavan, vice president & head of treasury at IDBI Gilts, ?This is a very illiquid security. Rate hike apprehensions and a slightly higher cut-off price by the bidders led to the devolvement.?

Currently, the yield on 6.85% paper bond maturing 2012 is trading at 6.15-6.20%, pointed out dealers. The market had expected a cut-off of 6.20% in the auction.

Meanwhile, the yield on the benchmark paper, 7.80% bond maturing in May 2020 fell by eight basis points to 7.56%.

In the last 15 days, bond yields have been highly volatile on account of various factors like high inflation, liquidity conditions and apprehensions of a rate hike.

Says Joydeep Sen, senior vice president (advisory, fixed income) at BNP India Wealth Management, ?Gilt yields have not increased significantly but the upticks are on account of rate hike apprehensions. Over the medium term, yields could be volatile on events like the European crisis or US treasury yields coming down. On any negative event yields would move upward.?

Banks borrowed Rs 39,220 crore from the RBI?s special repo window on Friday.