OMOs: Bond market's need of the hour

In November the RBI is auctioning government bonds for a notified amount of Rs 75,000 crore

Tracking the rupee’s weakness, government bond yields may again rise to levels seen in August, in the absence of open market operations (OMOs) by the central bank. In November, the Reserve Bank of India (RBI) is auctioning government bonds for a notified amount of Rs 75,000 crore, the highest in a month, according to the issuance calendar for marketable dated securities for the second half of this financial year.

On Monday, the yield on the 10-year benchmark 7.16 per cent government bond ended at 8.95 per cent, compared with Friday’s close of 8.99 per cent. On August 19, the yield had ended at 9.23 per cent, the highest so far this financial year. During Monday’s intra-day trade, the yield rose to 9.14 per cent, tracking the weak rupee.

In a post-monetary policy conference call with researchers and analysts last month, RBI Governor Raghuram Rajan didn’t give any hint of the timing of OMOs. “There are a variety of instruments we have because of the variety of market forces that can also add liquidity to the system. If government spending picks up, it would certainly add liquidity to the system. Other instruments such as OMOs and deposit growth would also help. But let me not give you a precise timeframe,” he had said.

Starting mid-July, government bond yields began rising, due to RBI’s liquidity-tightening measures. However, the yield had fallen in the recent past due to strengthening of the rupee.

“Unless there is an OMO, with every auction, we could see yields moving up. There is a possibility the yield may rise to August levels. Due to the demand from oil marketing companies returning, the rupee is trading weak. The foreign currency non-resident (bank) deposits window will close after November 30. Then, we will get to know the real strength of the rupee. Tracking the rupee, bond yields will move,” said Anoop Verma, vice-president (treasury), Development Credit Bank.

Due to the central bank’s steps to tighten liquidity, most banks have taken a hit on their treasury portfolios, as yields rose. “Banks are a bit apprehensive on buying more bonds because of the hit banks took in the previous quarter. If this continues, yields may again touch August-end levels,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.