Govt bond yields rise as crude surges; RBI steps in with OMO purchases

Government bond yields rose on Friday as crude and OIS rates climbed, before the RBI announced ₹1 trillion of bond purchases to ease liquidity tightness expected from March tax outflows

Government bond yields rose on Friday tracking the Overnight Indexed Swap rates amid surging crude oil due to the war in the Middle East, said dealers. The yield on the benchmark 10-year government bond settled at 6.69 per cent against the previous close of 6.64 per cent.

 

Brent crude oil prices rose to $86.94 per barrel, against the previous day’s $82.76 per barrel.

 

Post market hours, the Reserve Bank of India announced ₹1 trillion worth of bond purchases through open market operations in two tranches of ₹50,000 crore each on March 9 and March 13, to address liquidity tightness expected due to advance tax outflow this month. 

 

The central bank bought bonds heavily in the secondary market during the week, which kept the yield on the 10-year benchmark bond capped below 6.70 per cent, dealers said.

 

“The RBI did not buy bonds on Friday, which led to the rise in yields,” said the treasury head at a private bank. “Given the current geopolitical situation, there was paying in the OIS and crude oil prices have moved up, which led to selling,” he added.

 

Market participants said that the OMO purchase announced by the RBI is primarily aimed at injecting liquidity into the banking system ahead of large tax outflows expected in March. Market participants estimate that advance tax and GST payments could drain close to ₹4 trillion from the system, potentially pushing liquidity into deficit territory. In addition, recent intervention by the central bank in the foreign exchange market and the maturity of forex forward sales are also likely to withdraw rupee liquidity.

 

“The move is seen as a pre-emptive step to offset frictional liquidity pressure,” said the treasury head at a private bank. “The OMO auction will also help yields soften because the banks are in the money for two to three papers,” he added.

 

The net liquidity in the banking system was in a surplus of ₹3.02 trillion on Thursday, latest data showed.

 

The securities eligible for purchase on March 9 include the 6.01% Government Security (GS) 2030, 6.10% GS 2031, 7.18% GS 2033, 6.19% GS 2034, 6.33% GS 2035, 6.92% GS 2039 and 7.30% GS 2053. While the aggregate purchase amount has been notified at ₹50,000 crore, no security-wise allocation has been specified.

 

Meanwhile, the 1-year OIS rate settled at 5.61 per cent against the previous close of 5.55 per cent. The 5-year OIS rate settled at 6.22 per cent against the previous close of 6.10 per cent.

 

“There was offshore paying in the OIS today, hence we saw the surge in the 5-year segment by almost 15 basis points,” said a dealer at a private bank.

 

Latest data showed that the RBI bought around ₹9,900 crore worth of government bonds in the secondary market during the previous week, marking the third consecutive week of bond buying by the central bank apart from OMO auctions.

 

The central bank had bought ₹2,815 crore worth of government bonds in the secondary market on February 18. In the week ended January 23, the RBI had bought ₹12,655 crore worth of bonds in the secondary market.

 

“The RBI has been intervening in the bond market, especially for the last two trading sessions, which kept the yields lower despite the rise in OIS rates and crude oil prices,” said a dealer at a primary dealership. “Some selling on Friday was also because people did not want to keep long positions for the weekend,” he added.