Bond yields seen steady, OMOs eyed

The yield on government bonds is expected to be steady, as traders would be cautious amid tight liquidity. There are hopes the Reserve Bank of India (RBI) might take measures to ease pressure on liquidity, as the deadline for the final installment of advance tax draws closer.

On Friday, yields on the 10-year benchmark government bond closed at 8.22 per cent. Market participants expect the yields to be around 8.2 per cent this week.

“The expectation of aggressive liquidity support from RBI in the form of a cut of 50-100 bps in cash reserve ratio (CRR) and shift into rate cut mode before April 2012 annual policy is providing stability in the yields,” said Moses Harding, head, economic & market research, IndusInd Bank. RBI is slated to announce the mid-quarter policy review on March 15.

Last week, the liquidity deficit was almost Rs 2 lakh crore on the back of high demand for funds from banks. Year-end requirements, coupled with stacking up of liquidity to meet withdrawal pressure ahead of advance tax payments, added to the pressure. Banks borrowed Rs 1.7 lakh crore each day from RBI at the repo rate of 8.5 per cent last week.

This is despite the central bank cutting CRR by 50bps in the third-quarter policy review announced in January.

On Friday, RBI Deputy Governor H R Khan said open market operation could not be ruled out. “RBI is watching the situation closely... steps will be taken when needed,” said Khan on the sidelines of an event here.

Market participants are expecting RBI to infuse liquidity via Open Market Operations (OMOs) this week. “RBI may announce OMOs to help ease liquidity the crunch,” said a bond dealer with a public sector bank. Last week, RBI infused close to Rs 11,000 crore via bond purchases under OMO auctions.

Call money rates that traded in the range of 9-9.15 per cent last week are expected to inch up on high demand from banks. Lenders may borrow to meet reserve needs in the second week of the reporting fortnight.

Last week, the high demand for funds in the short-term money market had driven rates on certificates of deposit (CDs) of three month maturity to three-year high levels of 11.15 per cent. The rates, however, eased by 15-20bps towards the end of the week, followed by a rise in the number of CD issuances.