Bond yields soften as RBI buys

But still remain high on supply concerns

The Reserve Bank of India’s open market operations (OMOs) to buy benchmark government bonds pushed yields lower today. But concerns over the huge supply of government paper kept the yield at elevated levels.

Dealers said yields were soft in the morning, and the RBI’s decision to set the cut-off yield at 6.33 per cent (Rs 113) for 8.24-per cent 2018 paper – which was below current market levels – was taken as a positive sign.

“This did not have a lasting impact as fear of excess supply of paper in near future and the next financial year continues to influence sentiments," they said.

In morning trades, yield on 2018 – the most traded paper – touched a low of 6.36 per cent after opening at 6.47 per cent. At close, the yields hardened to 6.62 per cent, according to data available with the Negotiated Dealing System. This is still lower than the closing yield of 6.80 per cent (for 2018 paper) seen last week.

RBI bought bonds worth just over Rs 8,000 crore from the OMO auction. The amount was less than the targeted Rs 10,000 crore, which puzzled market players.

"Though the yield signal given by RBI was all right, the market is skeptical about the amount spent by the RBI," S Srinivasa Raghavan, head of treasury at IDBI Gilts, said.

Last week, RBI had rejected all bids for OMO auction, perhaps due to aggressive bids (in yields) placed by market players. It has lined up another OMO auction on Thursday to buy securities worth Rs 10,000 crore.

Some investors also doubted whether there would be any big OMO purchases in the future as the central bank did not buy the entire Rs 10,000 crore worth of 2018 gilts through OMO auctions.

Meanwhile, advance tax collections for the fourth quarter of the financial year 2008-09 have been buoyant, thanks to the banking sector, primarily public sector ones, while manufacturing sector continues to reel under the slowdown.

While installments of advance tax payments (of around Rs 25,000 crore) is not expected to put much pressure, banks are expected to be cautious. They parked Rs 22,755 crore today with the RBI through the reverse repo window of liquidity adjustment facility (LAF). This amount is much less than over Rs 40,000 crore absorbed daily.

Despite this, if there is an impression that liquidity is under pressure, RBI still has the option to cut the Cash Reserve Ratio (CRR) – the portion of deposits which banks have to place with the central bank – to release additional resources.

This is crucial to ensure adequate liquidity in the last fortnight of the financial year, the head of a public sector bond house said.