Bond markets rallied sharply after the Reserve Bank of India announced an unusually large Rs 2 lakh crore open market operation (OMO) purchase, easing concerns over year-end liquidity. Benchmark 10-year yields fell 8 basis points (bps) today, slipping from 6.63% to 6.55%, and have corrected 14 bps in two sessions from the recent high of 6.69%. The 10-year 6.48% 2035 G-Sec opened lower at 6.59% compared to yesterday’s close of 6.63%, rallied to 6.55% in morning trades, and is currently at 6.57%, down 6 bps from the previous close.
Aggressive Intervention
On Tuesday, post-market hours, the central bank said it would purchase Government of India securities worth about Rs 2 lakh crore through OMOs, spread across four tranches of Rs 50,000 crore each to be conducted on December 29, January 5, January 12, and January 22. In addition, it will undertake a three-year USD-INR buy-sell swap of $10 billion on January 13. The latest data shows that net liquidity in the banking system was in deficit to the tune of Rs 66,653 crore as of Tuesday, underscoring the timeliness of the RBI’s intervention.
Earlier this month, Reserve Bank of India Governor Sanjay Malhotra assured the market that “there will be ample liquidity, especially in this (low-rate regime) phase.” Market participants say they are encouraged that the RBI is adhering to its promise and maintaining comfortable liquidity conditions.
Analyst Outlook
Madan Sabnavis, Chief Economist at Bank of Baroda, said, “The liquidity infusion beginning December 29 is timely as credit demand rises, and could push yields further down to the 6.45–6.50% range.” Adding further, Gaura Sengupta, Chief Economist at IDFC First Bank, said, “The lower yields reflect improved supply-demand dynamics, with the pace of infusion expected to lift banking system liquidity to 1% of NDTL in January, providing comfort to near-term yields.” She highlighted that the OMO purchases are spread across the curve, which should keep belly (7- to 15-year paper) and ultra-long bond yields contained, with 10-year yields likely to hover between 6.50% and 6.55%.