Bond yields seen up on absence of open market operations

Yields on government bonds are expected to trade at elevated levels unless the central bank announces measures to facilitate a smooth transmission of the second-half borrowing plan, say market participants.

On Friday, while auctions for government bonds maturing in 2024 and 2040 were devolved on primary dealers, all bids received for those maturing in 2017 were rejected by the Reserve Bank of India (RBI). After touching nine per cent in intra-day trade, yield on the new 10-year benchmark government bonds closed at 8.94 per cent.

Last week, RBI deputy governor Subir Gokarn had said the central bank would consider liquidity conditions before deciding on open market operations (OMOs). “Markets are expecting RBI to announce a bond buyback which may help soften yields,” said N S Venkatesh, treasury head, IDBI Bank. He expects yields to be around nine per cent this week.

Banks, major subscribers of government debt, are already sitting on a statutory liquidity ratio of 27-28 per cent, higher than the minimum requirement of 24 per cent. “A bond buyback will help banks subscribe for new issuances,” said a senior treasury official of a public sector bank.

Traders said higher-than-expected inflation may push up yields further. The Wholesale Price Index — the country’s inflation indicator — for the month of October will be issued tomorrow. It rose by 9.72 per cent in September.

According to the borrowing calendar, RBI is scheduled to auction government securities worth Rs 13,000 crore this week. The government will borrow Rs 2.2 lakh crore in the second half of this financial year.

The inter-bank call money rate is expected to stay under pressure, as banks will borrow funds to meet reserve needs. The weighted average call money rate closed at 8.66 per cent on Friday. Bank borrowings from RBI’s repo window shot above Rs 1 lakh crore last week, as they scrambled to cover reserve needs in the holiday-shortened week. Additional government borrowing through cash management bills might add pressure to short-term rates, traders said.