The bond market rallied on Wednesday, with the benchmark 10-year G-Sec yield falling 9 basis points (bps) to 6.54% on the back of unexpectedly large liquidity measures by the Reserve Bank of India (RBI), which provided the much-needed boost. On Tuesday, post-market hours, the central bank said it would purchase government 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.
The amount was almost double the market expectation, which led the rally in the market on Wednesday. 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.
The 10-year 6.48% 2035 G-Sec after opening lower at 6.59% compared to the previous close of 6.63%, declined further to 6.53% before settling the day at 6.54%. In the past two sessions, the yields have corrected 15 bps from the recent high of 6.69%. Since the RBI policy on December 5, the G-Sec have faced selling pressure majorly from foreign investors, as markets interpreted it as the end of the rate cut cycle. This pushed up the yields by as much as 16 bps to 6.69% as of December 23.
Reversing the Selling Pressure
Earlier this month, RBI 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. “Therefore, I expect the rally to sustain for sometime. I expect yields to end the year at 6.50-6.55%, leaving room for more easing next quarter,” said a senior dealer at a large state-owned bank.
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%.
Market participants expect the rally to sustain going ahead and most believe the yield to trade in 6.45-6.55% in the near-term. “The liquidity measures were rolled out swiftly in January—hinting at the RBI’s readiness for another round in late February or early March if required. “I expect the rally to sustain as the market will become more comfortable when liquidity comes in,” said Alok Singh, treasury head, CSB Bank. “If the 10-year falls below 6.48% it could slip further to 6.30-6.35%,” he added.
Outlook for Q4
Going ahead, market participants will keep a close eye on the state development loans (SDL) issuance which is estimated around Rs 4.5 lakh crore for January to March quarter along with the Union Budget in February and the inclusion of G-Sec in Bloomberg Global Aggregate index.