Indian government bond yields surged on Tuesday despite the Reserve Bank of India’s (RBI) liquidity measures announcement on Friday due to lower demand and caution ahead of Budget.
The yield on 10-year benchmark government bond closed at 6.72% on Tuesday, the highest level since March. The yield was up 6 basis points (bps) from the previous close of 6.66% on Friday. The market was shut on Monday on account of Republic Day. So far in the month, yield was up by 14 bps.
“The RBI initially announced OMO on February 5 and February 12, which is post budget. And the last 10-year auction was scheduled on Friday before the budget. That has created some demand-supply mismatch in the short term, leading to some sell-off in the 10-year paper, which also impacted the overall market,” said Debendra Dash, chief dealer at A U Small Finance Bank.
RBI Prepones OMOs
Dash expects the yield to soften a bit (on Wednesday) as the RBI preponed the OMOs.
The RBI postponed bond purchases worth Rs 1 lakh crore through open market operation (OMO) to January 29 and February 5, instead of the previously announced February 5 and 12.
On January 23, the RBI announced liquidity measures worth Rs 1.25 lakh crore. The measures include a 90-day variable rate repo (VRR) operation amounting Rs 25,000 crore on January 30 and a three-year $/Rs buy/sell swap auction of $ 10 billion, which will be held on February 4, along with bond purchases worth Rs 1 lakh crore.
Budget Uncertainty Lingers
With a 10-year bond auction timed just before this week’s budget, market interest remains subdued amid high uncertainty, said a dealer at a primary dealership. The RBI is set to auction 10-year benchmark bond worth 32,000 on Friday.
Market experts highlight persistent overnight index swap (OIS) curve pressures signaling rate hikes also add to the negative sentiment.
“Ongoing pressure in the OIS curve continues to burden the market, with the curve now pricing in expectations of rate hikes. Overall, market sentiment remains somewhat fragile, also reflecting global factors,” said Suyash Choudhary, chief investment officer – fixed income at Bandhan Mutual Fund. One-year OIS stood at 5.60%, the highest level in eight months.
According to Gopal Tripathi, head of treasury at Jana Small Finance Bank, rising commodity prices and continued pressure on global bonds negate the liquidity announcement and bonds continue to weaken. Tripathi anticipates the 6.75% level will hold; a break could push it to 6.90%.