RBI cancels open market bond sale in surprise move

BENGALURU (Reuters) - The Reserve Bank of India (RBI), in a rare move, cancelled a bond sale via open market operation (OMO) worth 100 billion rupees ($1.54 billion) that was scheduled for Nov. 23, citing "evolving liquidity conditions".

The OMO sale of government securities was withdrawn due to "recent market developments and based on a fresh review of the current and evolving liquidity conditions", the RBI said in a statement on Friday. http://bit.ly/2jyz5ig

The announcement may kick-off a short-lived rally next week in the bond market, with the 10-year government bond yield likely to fall by 5 basis points, traders said.

"There will be a rally on Monday after the OMO news, but it won't sustain. Many traders have burnt their fingers already and they are not ready to keep buying," said a dealer with a private bank.

The 10-year bond yield ended at 7.05 percent, after hitting a low of 6.94 percent earlier in the day after Moody's upgraded India's sovereign rating.

The central bank has conducted nine OMO sales in 2017, all of which took place in the second half of the year, to drain excess liquidity from the banking system.

Continuous OMO sales have been a key reason for the massive sell-off in the bond market since June-end, in addition to concerns over inflation and fiscal discipline.

($1 = 65.0100 Indian rupees)

(Reporting by Vishal Sridhar and Samantha Kareen Nair in Bengaluru; Additional reporting by Suvashree Choudhury; Editing by Euan Rocha and Subhranshu Sahu)