Bond portfolios set to shine today as RBI embarks on OMO

In an utterly surprising move, the Reserve Bank yesterday said it will buy Rs 10,000 crore worth of bonds from the market today via open market operations (OMOs). Yields are expected to fall sharply tomorrow, reports Latha Venkatesh.
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Home » News » Markets » CNBC-TV18 Analyst - Rupee

Mar 30, 2012, 10.14 AM | Source: CNBC-TV18

Bond portfolios set to shine today as RBI embarks on OMO

In an utterly surprising move, the Reserve Bank yesterday said it will buy Rs 10,000 crore worth of bonds from the market today via open market operations (OMOs). Yields are expected to fall sharply tomorrow, reports Latha Venkatesh.

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Bond portfolios set to shine today as RBI embarks on OMO

In an utterly surprising move, the Reserve Bank yesterday said it will buy Rs 10,000 crore worth of bonds from the market today via open market operations (OMOs). Yields are expected to fall sharply tomorrow, reports Latha Venkatesh.

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Latha Venkatesh (more)

Executive Editor, CNBC-TV18 |

In an utterly surprising move, the Reserve Bank yesterday said it will buy Rs 10,000 crore worth of bonds from the market today via open market operations (OMOs). Yields are expected to fall sharply tomorrow, reports Latha Venkatesh.

This is the first known instance of the Reserve Bank buying bonds in the last day of the fiscal year. Usually, you buy bonds or increase liquidity in the system because the liquidity is tight or because you want to give a signal to yields, but it rarely ever happens on the last day of the fiscal year.

The immediate gain of course is for the public sector or for the entire banking system because you are going to see such a huge rise in bond prices tomorrow, probably by even a rupee. The bond yield for instance, the tenure could dip all the way from 8.57% that it closed today to maybe 8.5% or even go below to 8.47%. That would mean a bond price rise of maybe 80 paise to a rupee. This is going to be the biggest single-day rise in bond prices on the last day of the financial year and that will mean your portfolio of bonds is going to suddenly look very good. But the key message that the Reserve Bank is trying to give is don't short this market, we will come and support the yields anytime before you can even guess.

Usually, the Reserve Bank doesnít come-in in the earlier part of the borrowing programme to support yields; OMOs are done traditionally at the latter part. Initially, you let the market come to itís own conclusion as to where the yields must be, but here the hidden warning that the Reserve Bank is giving is the borrowing programme starts next week and Ďdonít be surprised, I can come in any time and start buying bondsí that is the only purpose for which this appears to have been done today.

So next week we are going to see perhaps very good bidding for the government bond programme itself because you are going to see a lot of short squeeze in the market, Venkatesh says. The only negative about a step like this is the Reserve Bank is not allowing the market to discover the yield curve on itís own. It is very nice that the Reserve Bank is constantly reading the act out through the government and saying you canít borrow like this, you are distorting the market, you are creating inflation. In that case, why donít you let the government pay the price for the money when it is borrowing too much? Every profligate borrower has to pay a higher price, why not the government itself? Why is the Reserve Bank coming in the way and preventing the government from learning itís own lessons that clearly is an argument to take the debt management office out of the Reserve Bank and make it independent.

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