The bond market is buzzing with activity even as yields look relatively stable.
are increasing their exposure to local bonds, mainly on the corporate bond side, while public sector banks
(PSBs) have become massive sellers of government bonds
in the market, booking profits after yields fell about 10 basis points in a week.
The yield on the 10-year bond stood at 6.46 per cent on Wednesday, from 6.56 per cent at the start of the month. According to the National Securities Depository data, foreign investors
bought $1.2 billion equivalent (Rs 7,853 crore) in Indian debt
paper on Tuesday, highest since April.
At the same time, the data from Clearing Corporation of India showed PSBs, on Monday, had sold Rs 1.02 lakh crore, and private banks sold Rs 2,348.4 crore in government bonds.
Foreign banks bought Rs 48,954 crore of the bonds
Dealers say local banks were booking profits, expecting bond yields to rise, considering the Reserve Bank of India (RBI) doesn’t look too pleased with the soft yields. The central bank sold Rs 6,036 crore of bonds
in the secondary market through its open market operation (OMO). It has announced another round of OMO sales
of Rs 10,000 crore on July 20. Going forward, the dealers expect the central bank to sell another Rs 20,000-crore worth of bonds.
According to bond dealers, the whole purpose of the OMO sales, which would suck out liquidity from the banking system, was yield management. Such OMO sales
increase the supply of liquid bonds
in the market and lead to a fall in prices, which push up the bond yields.
Even as the central bank’s official stance is not to manage yields or currency level, it does frequently intervene in these markets
through its own set of mechanism.
“Globally, the central banks are unwinding their positions and interest rates are rising. The RBI
here, meanwhile, is still under pressure to cut rates. This narrows the interest rate
differential and leads to outflow of funds. The central bank definitely won’t like it, and therefore there is some amount of yield management going on,” said a senior currency dealer, who did not wish to be named.
However, with retail inflation
hitting a record low of 1.54 per cent for June, bond yields could stay at low levels for a longer time, signalling expectations of a rate cut. The RBI
hopes to keep inflation
under four per cent in the medium term.
“The consistent undershooting of the Consumer Price Index target of the RBI
opens up the possibility of a further easing,” said Ram Kamal Samanta, vice-president treasury at SBI DFHI.
However, he said, at the current yields, most of the rate cut expectations had been priced in and there is little chance of yields moving significantly from the present levels.