The yield on the 10-year benchmark bond fell to over a 3-year low of 7.124% on Tuesday, down five basis points over Monday’s close
The yield on the 10-year benchmark bond fell to over a 3-year low of 7.124% on Tuesday, down five basis points over Monday’s close, following assurances from Reserve Bank of India (RBI) governor Raghuram Rajan that more liquidity would be infused into the system as the central bank moved to lower the deficit from 1% on net NDTL to closer to neutrality.
Market watchers expect more open market operations (OMO) in the current fiscal as the central bank’s stance remains ‘’accommodative”.
While bond yields have been trending down over the past several months and liquidity appears to be ample, the RBI’s observation just 40% of the “structural” liquidity deficit had been eliminated, suggests more liquidity will be infused.
Deputy governor Urjit Patel observed the central bank would move in a calibrated manner, to eliminate structural deficit in liquidity and was looking to do this over a one-to-two year time frame without it being disruptive.
Samiran Chakraborty, chief economist at Citibank observed, the surprise announcement of open market purchase of government securities — even while system liquidity has moved to surplus R40,000 crore in August — reinforces RBI’s commitment to neutral liquidity stance in a front-loaded manner. “The governor also hinted that RBI is almost 40% through in achieving liquidity neutrality, “Chakraborty wrote pointing out RBI has conducted R80,500 crore of OMO since the shift in liquidity stance in April 2016.
The RBI announced on Tuesday it will purchase Rs 10,000 crore of bonds on Thursday, adding to purchases of around R80,000 crore made since the beginning of FY17.
The yield on the benchmark note had remained largely unchanged last week after declining by close to 30 basis points in July. Between April and July, bond yields were largely range-bound, touching a high of 7.52% on June 13.
“I see the benchmark yield falling to around 7% and settling down at that level for some time, unless the RBI decides to cut the repo rate,” said Shashikant Rathi, executive vice-president and head investments, ALM and capital markets at Axis Bank.