Reserve Bank of India (RBI)’s plans to have a two-way open market operations (OMO) set a small rally in the government bonds on Wednesday. The 10-year benchmark government bond ended the day at 7.03% lower than the preceding close of 7.06%. Just before RBI’s policy announcement, they were trading at 7.07%.
A two-way OMO is when the central bank is ready to sell or buy back bonds from the banks to either suck out or release liquidity into the banking system.
“It is heartening to note RBI has also communicated greater clarity on the liquidity framework indicating that it is ready to deploy both short-term and durable tools to absorb or inject liquidity as the need arises,” Chanda Kocchar, managing director and CEO, ICICI Bank, said in a release.
The 10-year benchmark government bond yields and repo rate spreads had widened to 1%, doubling from September. A similar gap is also visible in the 10-year bond and the three-month bond rates. Last month, it called off an OMO signifying that the central bank was not comfortable with a yield beyond 7%. This helped in softening the yields.
Following Wednesday’s policy, the benchmark yields dropped marginally by two basis points (bps) to 7.03%.
“The relatively small-market reaction is indicative of the fact that the policy was largely on expected lines. Going forward, it is likely that RBI will be on hold for a period of time, and therefore, it is likely that gilt yields too will be relatively range bound,” said R Sivakumar, head –fixed income, Axis Mutual Fund.
Going forward, liquidity continues to remain in the surplus zone by end of 2017-18 to reach neutrality by first half of 2018-19.
Concerns regarding the fiscal slippages will continue to persist.
While an increase in borrowings to fund a wider fiscal deficit will have an impact on the appetite for bonds, a clearer picture is likely to emerge at the winter Parliament Session which starts on December 15, where an official request for an increase in borrowings might be tabled.
Abheek Barua, chief economist at HDFC Bank, said, “If RBI continues with OMO sales, there could be further steepening of the yield curve. If they build up positions in the forwards market, premiums rise and ultimately at the time of maturity, problem of excess liquidity has to be dealt with. If they intervene and buy dollars in the spot market, the rupee liquidity surplus aggravates. This goes against their overall hawkish stance to fight inflation.”
RBI managed surplus liquidity through the conduct of regular reverse repo auctions of various tenors, ranging from overnight to 28 days. On an average, banks deposited excess liquidity with the central bank which declined from Rs 2,22,900 crore in September to Rs 1,40,000 crore in October 2017 and further to Rs 71,800 crore in November.
The central bank conducted open market sales of Rs 30,000 crore in October-November, taking the total absorption of durable liquidity during the financial year so far to Rs 1.9 lakh crore, comprising Rs 90,000 crore in the form of open market sales.
AGAINST THE TIDE
- If RBI continues with OMO sales, there could be further steepening of the yield curve
- If they intervene and buy dollars in the spot market, the rupee liquidity surplus aggravates, say experts
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