The Reserve Bank of India (RBI) on Monday bought Rs 10,000 crore of 10-year bonds from the secondary market, while selling Rs 8,501 crore of short-term bonds, in the special open market operations (OMO), held for the second time this calendar year.
Interestingly, instead of the 10-year bond yields coming down, it increased about 5 basis points to close at 6.55 per cent after the OMO. The idea of such OMO is to bring down longer term yields, while pushing up short-term yields. The rise in yields is despite the cut-off for the 10-year coming at 6.4874 per cent. The cut-off yields for the shorter maturity papers to between 5.39 per cent and 5.51 per cent for three papers. The RBI decided not to sell a particular paper, perhaps because of lower yields offered by the market.
“After the OMO, state government auction calendar came, which showed states would be borrowing some Rs 25,000 crore extra in the next three months. This spooked the market,” said the head of treasury of a bank.
Last week, the RBI had bought its full quota of 10-year bonds, but sold just Rs 6,825 crore in aggregate of short-term bonds maturing in the next year. According to a senior bond dealer, the yields rose after the OMO was done to reflect the fundamentals and to reflect the fact that yields needed to be higher when there is a clear fear of at least Rs 50,000 crore of extra borrowings coming before the close of the financial.
“The OMO announcements brought down yields from 6.75 per cent to 6.55 per cent. You cannot expect the yields to go down even further considering that the RBI had pause in December,” said the bond dealer.
If there is further OMO announcement, the bond yields will likely fall temporarily. The yields fall as prices rise. The lower yield helps the government to borrow cheaper.