Apr 02, 2012, 08.35 AM IST | Source: CNBC-TV18

Bond mkt to govt: We don't like this over supply of bonds

Bond yields fell below 8.5% and prices rose in early trade on news of RBI's surprise bond purchase program, but equally surprisingly bonds lost all their gains by end of day. CNBC-TV18's Latha Venkatesh reports.

Latha Venkatesh

Executive Editor, CNBC-TV18

Bond yields fell below 8.5% and prices rose in early trade on news of RBI's surprise bond purchase program, but equally surprisingly bonds lost all their gains by end of day. CNBC-TV18's Latha Venkatesh reports.

The implication of the fact that the bond yields have come back after a surprise buying programme announced by the RBI is that bond yields are going to rise in the coming quarter.

The bonds yields were rising to 8.6%. They rose about 20-24 basis points in just two days in this week and that is what appears to have triggered the RBI action of buying bonds today. However, when you ask the RBI they said, "No, we are buying only because we expect a liquidity crunch. Parliament's Budget session was delayed. They didn't sign all the cheques and that is why there could be a liquidity crunch, which is why we are buying Rs 10,000 crore of bonds."

But actually RBI bought only Rs 4,000 crore. Now what impact will Rs 4,500 crore will have in a market that is short by over Rs 1 lakh crore.

Clearly, the RBI was not buying bonds to adjust liquidity. They were buying bonds only to warn the market that, if market takes the yields higher then the central bank will come with OMOs. But the market has warned the RBI back. "You may come with any amount of OMOs. We don't like this massive supply of government bonds, so yields are going to rise." This is a very important message coming from the market to the RBI--that's just the messenger--but really it's a message to the Government of India.

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