Govt bond yields rally by 9 bps after RBI announces liquidity measures

RBI announced ₹2 trillion of OMO purchases and a three-year $10 billion USD/INR buy-sell swap, triggering the sharpest bond market rally since April 2

Government securities market on Wednesday witnessed its strongest rally since April, with the bond yields plunging sharply by 9 bps after the Reserve Bank of India (RBI) announced liquidity measures, including ₹2 trillion of open market operation (OMO) purchases and a three-year USD/INR buy-sell swap of $10 billion.

 

The bond market extended gains as the yield on the benchmark 10-year government bond, which opened about 5 basis points lower, settled 9 basis points lower at 6.54 per cent.

 

This is the strongest rally in the government bonds since April 2 this year, when the bond yields fell by 10 bps. 

 

“The bond market rallied sharply after the RBI announced ₹2 trillion of OMO purchases and around ₹1 trillion swap, pulling the benchmark yield down to the 6.53 per cent-6.54 per cent range, with scope to test around 6.50 per cent in the near term,” said a dealer at a primary dealership.

 

The central bank will purchase Government of India securities worth ₹2 trillion through OMOs in four tranches of ₹50,000 crore each, to be conducted on December 29, January 5, January 12, and January 22. 

 

“The rally in bond yields today was largely in response to the liquidity measures announced by the RBI. However, further rally in yields appears limited, and they are likely to stabilise around 6.50 per cent. Going ahead, the central bank may increasingly rely on forex swaps to inject liquidity, as there are practical limits to the extent of Open Market Operations it can conduct”, said Madan Sabnavis, chief economist, Bank of Baroda.

 

While some of the securities notified for the OMO auction are relatively illiquid, traders said the RBI’s selection is driven not only by liquidity considerations but also by the ease with which banks can tender their holdings, adding that more liquid benchmark papers could be included in subsequent auctions.

 

“Liquidity is not the sole criterion for OMO selection, the RBI also considers how easily banks can tender their holdings, and more liquid papers may be included in the other auctions,” said a dealer at a primary dealership.

 

Last week, the central bank intervened aggressively in the foreign exchange market to stem the sharp depreciation of the local currency against the US dollar. The currency had come under pressure amid uncertainty over a trade deal with the US and persistent foreign portfolio investor (FPI) outflows from the equity and debt markets.

 

The strengthening of the rupee from 91 per dollar to 89 per dollar due to intervention has tightened system liquidity.

 

In the recently concluded monetary policy meeting, RBI Governor Sanjay Malhotra had assured the market that the central bank will ensure ample liquidity in the banking system even without explicitly targeting surplus levels of around 1 per cent of net demand and time liabilities (NDTL).

 

The central bank has infused ₹1.45 trillion durable liquidity so far in December through OMO purchases and forex buy-sell swaps.