In the weeks following the announcement of Operation Twist, the benchmark yield had fallen to as low as 6.503%
The yield on the 10-year benchmark closed seven basis points higher to hit over three-week high of 6.66% on Tuesday after the market was disappointed with the higher than expected December CPI inflation that stood at close to five-and-a-half year high of 7.35%.
As on Tuesday evening, the benchmark yield has lost 17 basis points in gains that were made after the central bank announced ‘Operation Twist’, following which it had bought Rs 30,000 crore of long-dated securities from the market so far. It is noteworthy that in the weeks following the announcement of Operation Twist, the benchmark yield had fallen to as low as 6.503%.
Vijay Sharma, senior executive vice-president at PNB Gilts, said that dealers and traders are on the sidelines till the Union budget and they are unlikely to take any huge trading bets in anticipation of any events but would rather react only if something actually materialises.
“The main event that the market is looking forward to is the budget. We don’t believe there are any more rate cuts in the near term and think that the RBI will be on an extended pause. I think yields may hit 6.75-6.80 if there is disappointment on further operation twists. However, if RBI continues with Operation Twist on fortnightly basis, the yields could move in the range of 6.60-6.75,” Sharma said.
Market participants now believe that a rate cut in February seems unlikely and any possible easing is likely to get delayed. For instance, a report by Bofa Securities stated that the next rate cut is expected in April.
“We track January inflation at 6.85% taking average onion prices. If the latest Rs 60/kg onion price reading is taken, January CPI inflation cools off to 6.3%. Against this backdrop, we see another dovish pause from the RBI MPC on February 6. We postpone our next rate cut to April from February,” the BofA report said.
Furthermore, unlike the weeks following the first announcement of the Operation Twist, last week the central bank did not announce any fresh OMOs. A section of the market believes that even if the central bank does not announce the OMOs on a weekly basis, a fortnightly announcement should bring some relief to the yields.
Kamal Mahajan, head of treasury and global markets at Bank of Baroda, believes the benchmark yield may not go beyond 6.70% in the near term.
“The hopes on Operation Twist are not yet over. The steepness of the yield curve is not very comfortable. In regard to Operation Twist, I believe the regulator would not bring in something only for symbolic reasons. If they have come out with an Operation Twist, it has to be close to Rs 60,000-70,000 crore. If the market was really worried about inflation and hopes of Operation Twist were over, the yields would have shot up to 6.90%. But that has not happened,” Mahajan explained.