Yields seen down on higher FII cap, OMOs

Higher participation from foreign investors and bond purchase by the Reserve Bank of India (RBI) are expected to soothe rising yields this week.

On Friday, yields on 10-year government paper closed at 8.8 per cent, up four basis points over previous close. Yields have softened by 10 bps over the week. However, even after RBI’s announcement of bond purchase, there was devolvement on primary dealers in the auction of new 10-year paper, offering a coupon rate of 8.79 per cent on Friday. The government borrowed Rs 6,000 crore through the sale of 10-year paper, of which Rs 1,150 crore was bought by primary dealers.

RBI said it would buy bonds worth Rs 10,000 crore through open market operations (OMOs) on November 24. “The success of OMOs will largely depend on the securities that will be bought back,” said the treasury official of a Mumbai-based public sector bank. RBI is yet to announce the securities to be bought back.

Market participants expect more demand to be created for government debt after the cap for foreign investment was increased from $10 billion to $15 billion. The government will be borrowing Rs 4.7 lakh crore, against the Rs 4.17 lakh crore budgeted earlier.

“The increase of FII limit in debt will improve the outlook for portfolio investment flows somewhat, especially given that FII investment in equities remains weak,” said Deutsche Bank economists Taimur Baig and Kaushik Das. The Securities and Exchange Board of India said it would auction the increased investment limit for government debt to foreign institutional investors on November 30.

According to the issuance calendar, RBI is expected to auction Rs 13,000 crore this week. The same will be notified on Monday.

The inter-bank call money rate is expected to stay high this week, as banks will borrow more to cover reserve needs at the start of new reporting fortnight. The call rate may move in the range of 8.6-8.75 per cent even as Collateralised Borrowing and Lending Obligations are seen at 8.6-8.7 per cent.