The Reserve Bank of India on Thursday completed the first of two open-market bond purchases for December, taking its debt buys this financial year to a record Rs 3.16 lakh crore. The central bank bought Rs 50,000 crore of bonds across maturities ranging from 2029 to 2050 at higher-than-expected cutoff prices, lifting secondary-market yields.
It is slated to buy another Rs 50,000 crore of bonds next Thursday, and with nearly three-quarters of purchases concentrated in six- and seven-year maturities, traders expect the 10-year 6.33% 2035 paper to be included in the next operation.
“The cut-off yields at better than market expectation imply that banks are not willing to sell at higher yields,” said Debendra Kumar Dash, chief dealer at AU Small Finance Bank.
Market Reaction
Following the debt purchase, the benchmark 10-year yield settled at 6.6122%, compared with 6.6649% on Wednesday. “Today’s OMO auction of Rs 50,000 cr was fully accepted by the RBI. This will create replacement demand for bonds in the secondary market which can improve liquidity of bonds and lead to lower yields,” Dash said.
RBI’s Aggressive Stance
The RBI, under Governor Sanjay Malhotra, has aggressively added liquidity to the banking system to reinforce the impact of recent rate cuts. The central bank has lowered the repo rate by 100 bps to 5.25% and cut the cash reserve ratio by 100 bps. Surplus liquidity improves policy transmission by giving banks more cash to lend.
In the latest MPC meeting, the RBI announced liquidity measures worth Rs 1.5 lakh crore, including bond purchases of Rs 1 lakh crore through OMOs and a three-year USD/INR buy-sell swap of $5 billion. Market participants expect further liquidity measures worth Rs 1.5 lakh crore in the March quarter to counter higher currency leakage and negative impact from possible forex intervention.
“The expectations are leaning more towards announcements of further OMOs and Fx swap auctions to support rupee system liquidity and thereby maintain overnight rates close to the repo rate,” a dealer with a private bank said.