The Reserve Bank of India (RBI) has resumed purchase of government bonds after a gap of six months, as it infuses liquidity into the banking system via the secondary market, according to central bank data released on Friday. The RBI net bought bonds worth Rs 12,470 crore for the week ended November 7, and was on the bidding side for three of the four sessions for which data were published.
The intervention has brought some relief among market participants. Speculation was rife last week that the RBI might have bought bonds, as there was a noticeable rise in purchases from the ‘others’ category. According to data from Clearing Corporation of India, the ‘others’ category, which includes the RBI, net bought Rs 20,547 crore in the previous week. In this week, the central bank purchased bonds worth Rs 13,022 crore.
The yield on the 10-year paper ended 6.49% on Friday. Yields have softened following the RBI intervention. Prior to that, concerns over demand were pushing up bond yields, which saw the RBI cancelling auction of a seven-year paper on October 31.
“RBI’s recent intervention in the secondary market clearly suggests that the central bank is not comfortable with the current elevated yield levels relative to prevailing monetary conditions. The rejection of one of the securities in the October 31 auction further reinforces the regulator’s discomfort with the yield trajectory. These actions also point to an intent to bolster durable liquidity,” said VRC Reddy, head of treasury, Karur Vysya Bank.
“The purchases are on expected lines, as the earlier elevated figures in the ‘others’ category were driven by a single underlying factor,” Reddy said.
Market participants expect the RBI to continue such intervention in the third quarter as well, with the demand-supply dynamics still remaining weak. They further expect open market operations (OMOs) worth Rs 1.5-2 lakh crore in the fourth quarter, as the last tranche of cash reserve ratio cut be will come into effect in December.
“There appears to be adequate room for the RBI to commence OMO purchases from December. If not then, January seems highly probable. The upcoming MPC meeting will provide greater clarity on the timing and scale of such operations,” said Reddy.
