Government bond yields fell on Friday, ending four basis points below the previous close, after Prime Minister Manmohan Singh said India’s measures to drain liquidity would be temporary and after reports that a sovereign bond issuance was being considered by the government.
The yield on the 10-year benchmark government bond 7.16 per cent 2023 ended at 7.94 per cent, compared to the previous close of 7.99 per cent. On Friday, the Rs 15,000-crore bond auction devolved partially due to the liquidity crisis scenario. Primary dealers were forced to buy bonds a little over Rs 3,500 crore as bankers are facing liquidity crisis following the Reserve Bank of India’s (RBI) liquidity tightening moves on Monday (July 15).
“We do not have clarity on the liquidity scenario and there is also a sense of caution ahead of the first-quarter review of the monetary policy due to which we had quoted much lower price than the cut-off price in the auction,” said a treasury head with a public sector bank. RBI had auctioned bonds following the uniform price auction method under which successful bidders are those who bid at the cut-off price or higher than the cut-off.
As bonds have been volatile after RBI’s liquidity tightening steps, from Tuesday Fixed Income Money Market and Derivatives Association of India (FIMMDA) had also removed the upper circuit and lower circuit of trading. On Monday, RBI delivered a surprise 200 basis points hike in the Marginal Standing Facility along with capping banks’ repo borrowing to Rs 75,000 crore and the announcement of the absorption of market liquidity through the open market sale of government securities. Due to these liquidity tightening measures, it was the worst week in four-and-a-half years for the bond market. On Tuesday, the yield on the 7.16 per cent 2023 bond had ended at 8.07 per cent. The Street expects the yield on the 7.16 per cent 2023 bond to touch eight per cent again next week.
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