Yields on government bonds may ease as the Reserve Bank of India (RBI) will purchase Rs 12,000 crore worth of securities under Open Market Operations (OMOs) on Tuesday.
On Friday, the central bank announced after market hours that it would buy 8.19 per cent bonds maturing in 2020, 8.79 per cent bonds maturing in 2021, 8.08 per cent bonds maturing in 2022 and 7.35 per cent bonds maturing in 2024, under OMO.
The yield on the 10-year benchmark government bond closed at 8.35 per cent last week. The government had issued a new 10-year benchmark bond at a coupon rate of 8.15 per cent.
Traders said yields may ease further to 8.2-8.25 per cent levels, following the bond purchase by RBI.
Liquidity deficit in the system improved to Rs 80,000-70,000 crore last week, from above Rs 1 lakh crore a fortnight ago. This week, liquidity pressures may ease, as there is no bond sale auction scheduled according to the issuance calendar. Also, data on industrial production and inflation will be closely watched for rate cut signals.
The Index for Industrial Production (IIP) for the month of April will be released on Tuesday and the Wholesale Price Index (WPI) data for the month of May will be released on Thursday. RBI will announce the mid-quarter monetary policy review on June 18.
Taimur Baig and Kaushik Das, economists at Deutsche Bank expect inflation to rise to 7.6 per cent from 7.2 per cent in April. “Although core inflation may remain below five per cent in May, it may well begin rising in the months ahead, if firms are compelled to pass on some their increased import costs,” they pointed out in a report.
Core inflation or increase in non-food manufactured products prices have been around five per cent in February and March.
Last week, top central bank officials said the fall in global crude prices and core inflation are sources of relief though RBI will also look at other factors like growth before deciding on the policy action in its first review this financial year.
In April, RBI cut policy rates by 50 basis points, citing pressures on growth amid global economic uncertainty. The central bank, however, had cautioned that there may be limited room for rate cuts going ahead, owing to upside risks in inflation.
This was the first rate cut in three years. From March 2010 to October 2011, RBI increased policy rates in order to bring down stubbornly high inflation.