The Reserve Bank of India’s (RBI) open market operation (OMO) purchase of government securities to inject liquidity is likely to support bond yields, which have been rising since the terror attack in Kashmir, in the near term, market participants have said.
The yield on the government securities, especially the 10-year benchmark bond, has risen in the last few days after the April 22 terror strike in Pahalgam left 26 people dead and ratcheted up tensions with Pakistan.
This strike dampened the sentiments and some sell-off was witnessed in the market.
“As the bond yields are going northward due to geopolitical tensions between India and Pakistan, the RBI has announced the OMO purchase so that it can inject liquidity and help bond yields to ease,” said Mataprasad Pandey, vice-president of Arete Capital Service.
According to the Clearing Corporation of India’s (CCIL) data, the yield on the 10-year bench mark bond 6.79 percent 2034 rose around 7-8 basis points (bps) after the Pahalgam attack.
On April 28, 10-year benchmark bond yield ended at 6.396 percent.
The RBI’s decision to conduct OMO purchases was aimed at maintaining durable liquidity conditions, V Ramachandra Reddy DGM-Head Treasury, The Karur Vysya Bank, said.
Although liquidity remains in surplus, the forthcoming maturity of forward foreign exchange sales could potentially lead to a liquidity drain. To pre-emptively the shortfall, the RBI has announced OMO purchases.
On April 28, the RBI announced OMO purchase auctions of government securities for an aggregate amount of Rs 1.25 lakh crore in four tranches.
The first auction of Rs 50,000 crore will be held on May 6, Rs 25,000 each on May 9, May 15, and May 19, according to the RBI’s release.
A treasury head with a state-owned bank said the move could also be attributed to central bank wanting to keep liquidity in surplus as tensions rise between the two neighbours and also support market sentiment.
The liquidity infusion would also help lower the coupon on the new benchmark bond, which would be auctioned on May 2, money market experts said.
The new bond was announced by the RBI after the old benchmark bond completed the outstanding amount of Rs 1.84 lakh crore.
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