Bond market dealers watch out for RBI's unannounced purchases

It is hard to say if the OMOs are being done to soften yields, or to fill up the central bank's stock of bonds, but yields did not move up sharply in auctions

Bond market participants expect the Reserve Bank of India (RBI) to increase secondary market bond purchases, either pre-announced, or even unannounced, as a tool to contain yields. 

Bond yields have remained soft for the time being, largely due to the huge surplus liquidity in the banking system. The central bank, though, has also entered the bond market to pick up securities unannounced. It is difficult to say if this has been done to soften yields, or to fill up the central bank’s stock of the bonds, but the impact has been that yields did not move up sharply in auctions, and the central bank could push through the entire bonds on offer even as the auction size ballooned to Rs 30,000 crore per week recently, from the normal Rs 18,000-19,000 crore. The government recently increased the borrowing programme to Rs 12 trillion, from Rs 7.8 trillion planned earlier.  

But even in the face of such high borrowings, the bond yields did not shoot up. Despite oversupply, the 10-year bond yields remained largely anchored around 6 per cent. The 10-year benchmark bond yield is now at 5.82 per cent. The old 10-year benchmark, also the most traded in the market, is at 6.02 per cent. 

Data released by the central bank showed that in this calendar year so far, the central bank has purchased more than Rs 1.63 trillion through unannounced OMO operations. The last such happened on May 8 when the RBI bought Rs 29,468 crore of bonds. Data released on Friday did not reflect any further OMO actions by the RBI in the month of May at least.  

Between January and now, there were a few simultaneous OMO announcements, but the central bank clearly stated the nature of the OMOs. In those operations, the central bank bought long term bonds and sold an equivalent amount of short-term treasury papers to manage yields. 

Such simulatenous OMOs did not disturb the liquidity profile of the system as the central bank aimed to buy and sell an equivalent amount of securities through such announced OMOs.  

“With liquidity being abundant, the only guiding factor for any such coveted or open intervention could be to reign in volatility of yields and anchor benchmark yields to an acceptable slope over overnight," said R.K. Gurumurthy, head of treasury at Laxmi Vilas Bank.  

To curb the banking sector liquidity, the RBI recently conducted an 84-day cash management bill (CMB) of Rs 80,000 crore. Yet, banks parked surplus liquidity of Rs 6.58 trillion with the RBI on Thursday.  

“Why the RBI would like to do the OMOs unannounced could be many. One could be that system liquidity surplus is highest ever, even higher than the post-demonetisation glut. In this backdrop, instead of being seen as pumping in more liquidity, they are doing in from the background. RBI will continue to support the market - 'whatever it takes'," said Joydeep Sen, consultant, fixed income, Philip Capital.  

Bond dealers also say that the central bank will eventually have to announced an OMO calendar, once the banking system liquidity start normalising again, but any OMO announcement would also have to be neutralised through instruments such as CMBs that would suck out the excess liquidity caused by the OMO. 

It was reported that at the time of announcing the extra borrowing, the government had told the RBI to keep the borrowing cost low. In a recent webinar, former RBI governor D. Subbarao also said that there could be more borrowing in the current fiscal, as necessitated to fight an economic slowdown, but the government should also have its own set limit of how much more it can borrow.   

“OMOs will be announced if we see yields spiking under normal conditions.  The current strategy could be to subdue and cap yields and when economic activity normalizes and there is clarity on real net borrowing, the strategy will be to actively drive yields lower to sustain appetite,” Gurumurthy said.  

“Whether it will be official OMO, it depends - if yields move up, they may do it. By the way, RBI has always been a major participant in the secondary G-Sec market, but it does not get highlighted as much," said Sen.