Bond yields rise on RBI panel's OMO talk

Use instrument only when warranted by liquidity: Panel

The sentiment in the bond market was hit on Wednesday, as an expert panel set up by the Reserve Bank of India (RBI) said purchase of government bonds shouldn’t be used to manage yields on government securities. It added open-market-operations (OMOs) should be used only when warranted by liquidity conditions.

In the past, RBI has occasionally used OMOs to manage volatility in bond yields. Though the central bank hasn’t admitted it openly, the market has, on several instances, viewed OMOs as an instrument to manage bond yields.

“Yes, when bond yields are under pressure for reasons beyond liquidity (expectations of rate rise, currency depreciation or slippage in economic or monetary dynamics), market stake holders expect RBI to step in with bond purchases to extend support to the bond market and arrest the rise in bond yields, which have a direct impact on the government’s borrowing costs. In the absence of this comfort, when bond yields come under pressure, it would be an extended weakness without RBI’s support on the bid,” said Moses Harding, group chief executive officer (liability and treasury management) & chief economist, Srei Infrastructure Finance.

On Wednesday, the yield on the 10-year benchmark 8.83 per cent 2023 government bond closed at 8.61 per cent, compared with previous close of 8.55 per cent.

Through the last few days, the yield has seen a decline. On Monday, RBI had announced an OMO of up to Rs 10,000 crore scheduled for Wednesday. It had also deferred a government bond auction for a notified amount of Rs 15,000 crore.

On Wednesday, the central bank injected Rs 9,477.2 crore through an OMO. Government bond dealers said this was aimed at bringing down bond yields, as the liquidity in the system wasn’t tight.

“I do not think RBI has ever mentioned it carried out OMOs for yield management. OMO is a tool for liquidity management. But at the same time, when there is nervousness in the market, which RBI feels is not correct, it will come out with OMOs, though it may not say it is to manage yields. Going forward, too, it may do so to manage volatility in yields,” the treasury head of a private sector bank said, on condition of anonymity.