The yield on government bonds, especially the 10-year benchmark bond, is likely to trade in the higher range till the market gets clarity on the quantum of open market operations (OMO), experts said on October 6.
Most experts believe that 10-year benchmark bond yields may trade at between 7.15 percent and 7.35 percent. But investors and traders may remain uncertain till there is clarity on OMO and the expectation of tighter liquidity conditions, they said.
Reserve Bank of India (RBI) Governor Shaktikanta Das, during his monetary policy address on October 6, said the central bank may consider OMO sales to manage liquidity.
OMO is a term which refers to the purchase or sale of government securities in the open market by the central bank. OMO sales are negative for bond yields because the RBI’s sale of bonds in the open market will lead to a fall in prices of bonds and increase in yields. Bond prices and yield are inversely proportional.
“On the liquidity front, the Governor hinted at the possibility of using OMO sales operations, if required. Hence, while the policy outcome was largely in line with expectations, the possibility of OMO sale operations by the RBI will keep bond bulls in check till further clarity emerges,” said Churchil Bhatt, Executive Vice President & Debt Fund Manager at Kotak Mahindra Life Insurance Company.
According to Sakshi Gupta, Principal Economist at HDFC Bank, traders’ reaction after the OMO sale announcement might be exaggerated and there could be some retracement lower. “However, one should expect the trading range for the 10-year yield to be higher now.”
Das further said that the timing and quantum of such an operation will depend upon evolving liquidity conditions, and OMO sales will be done through the auction process.
Also read: RBI holds interest rates, markets move on, your EMIs remain unchanged
Will OMO sales be delayed?
Some market participants believe that the OMO sales will be delayed if the RBI is successful in draining out excess liquidity through variable rate reverse repo auctions (VRRR).
“I feel if RBI is successful with VRRR to drain out liquidity, OMO sales can be delayed. On a given day, 14-day VRRR is preferred as it drains out liquidity temporarily, but OMO sale is a permanent liquidity drain out,” said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincorp.
In the last few weeks, borrowings by banks through marginal standing facility (MSF) remained elevated, and on the other hand, banks parked substantial funds under the standing deposit facility (SDF), showing the skewed distribution of liquidity in the banking system, the RBI governor said during the monetary policy review.
Further governor said banks have preferred to place funds under the overnight SDF instead of offering them in the main 14-day VRRR operations. It is imperative that banks assess their actual liquidity requirements over the reserve maintenance cycle and bid accordingly in the auctions under main 14-day VRRR operations.
“It is desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates,” Das added.
The last VRRR auction conducted by the RBI on September 22 also showed muted response from the banks, where they only parked Rs 5,995 crore out of Rs 50,000 crore notified. On September 22, banks parked Rs 60,650 crore in the SDF.
Also read: MPC meeting: Policy is reflective of growing inflationary risks
Impact on yield
Soon after the announcement by the RBI, yield on the 10-year benchmark government bond started rising. Initially, in the morning trade it rose 7-8 basis points (Bps), and later in the afternoon trade, it rose by 15 bps.
One basis point is one hundredth of a percentage point.
Currently, the yield on 10-year benchmark government bonds is trading at 7.3645 percent, which was over a six-month high. This level was the highest since March 21, 2023, according to data from Bloomberg.
Further, at the weekly bond auction, the cut-off yield set on the 10-year bond 7.18 percent 2033 was also higher at 7.3514 percent.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
