Sovereign bonds rally after RBI unveils large-scale debt purchase plan

By Subhadip Sircar

 

Bonds in India rallied after the monetary authority announced a large debt purchase for May, a move which will significantly add to the cash surplus in the banking system.

 

The benchmark 10-year yield fell seven basis points to 6.33 per cent to trade near a three-year low. The 7.1 per cent 2034 bond also slid by the same magnitude.  

 

The intervention is expected to coincide with a substantial dividend payout by the RBI to the government, further boosting system liquidity. The cash injections and rate cuts have sparked a sovereign bond rally, pushing the 10-year yield down by over 40 basis points this year — a decline that already exceeds all of 2024.

 

“The aggressive pace of OMO purchases is likely to eclipse even the Covid-19 period,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd. in Mumbai. “RBI liquidity management is focused on faster and more effective transmission of rate cuts.” 

The Reserve Bank of India said late Monday that it would buy Rs 1.25 trillion ($15 billion) of bonds in May. With this purchase, the central bank would have bought Rs 2.45 trillion of debt since April 1 alone.

 

Governor Sanjay Malhotra has said the authority will aim to keep liquidity in 1 per cent surplus of net deposits.