The government bond market initially responded positively on Friday to the policy rate cut by the Reserve Bank of India, but yields rose afterwards due to profit booking by some market participants.
The yield on 10-year benchmark bond fell to 6.45% before settling at 6.49%, down 2 basis points (bps) from the previous close.
The initial rally happened because a part of the market was not expecting a rate cut, said market participants. However, uncertainty of future rate cut dampened sentiment and prompted profit booking mostly by mutual funds, they added.
What do analysts say?
“The market believes that today’s (Friday) rate cut would likely be the last one, leading to some profit booking. There was also disappointment that the announced OMO (open market operations) amount was lower. Market expected bond purchases via OMOs worth Rs 2 lakh crore but only Rs 1 lakh crore has been announced so far,” said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
Along with a 25-bps rate cut, the RBI announced liquidity measures worth Rs 1.5 lakh crore including bond purchases of Rs 1 lakh crore through open market operations (OMO) and a three-year USD/INR Buy Sell swap of $ 5 billion.
Pawar on yields
Pawar expects the yields to trade in a range and do not see a large rally from here on. Having said that, a lot will also depend on the prices at which the OMO auctions clear, he added.
When asked about the transmission in the bond market, the governor responded that the spreads are not that high. “If you compare your current bond yields with the yields earlier and the spreads, they are more or less similar. The spreads are not higher. Please keep into account that when the policy repo rate will be lower, the spread will be higher,” said RBI Governor Sanjay Malhotra in the press conference. He added that you cannot expect the spread at 6.50% to remain the same for a 10-year bond when the yield is at 5.50% or 5.25%.