RBI’s bond sale plan leads to rout – Times of India

MUMBAI: The government bond market witnessed a selloff on Friday after the RBI governor said that the central bank could resort to open market operation (OMO) sales to manage liquidity in the banking system. Bond prices fell and benchmark 10-year gilt yields firmed up by 12 basis points (100bps = 1 percentage point) to close at 7.34% while the cut-off yield for the same bond at Friday’s auction was 7.35%.

Under OMO, the central bank either buys or sells government securities (G-Secs) to pump in or pull out liquidity from the system, as the situation warrants. In case of OMO sales, RBI would sell G-Secs in the market and take in money. Fearing excess supply of G-Secs, on Friday the prices of these bonds fell and yields rose. This happened despite the governor clarifying that it could resort to OMO sales only to manage liquidity and not yield.
The bond market, however, had a different view. According to economists and bond dealers, the yield differential between US and India 10-year G-Secs have fallen to historically low levels. This could have a negative impact on the strength of the rupee moving ahead as the rupee-dollar exchange rate is near its historic low.
In the forex market, the rupee closed almost unchanged at 83.25 to the dollar on Friday. Market players, however, expect some volatility in the coming week.
“The 20-year average yield differential between India and US is 460bps. Last year’s average was 360bps while currently it’s lower than 250bps. This could be a cause for concern for RBI since it has not hiked the policy rates this time. OMOs by RBI could help arrest the rate differential from narrowing further,” a bond dealer said.
A recent report by Emkay Global Financial Services had noted that the expected resumption of an uptrend in dollar and US Treasury yields would require significant shock repricing of higher yields outside the US. “The rate differential between EM Asia/India and DMs has reached unprecedented levels, generating renewed concern about further volatility ahead,” the report said.
In the stock market, the reaction to RBI’s decision to maintain status quo on rates led to a rally, although delayed. The sensex was initially unchanged but in the late session rallied 364 points to close at 65,996. Bajaj Finance, Infosys and ITC contributed the most to the index’s gain, BSE data showed.