Why yields on 10-year bonds would inch to 8.45% ahead

With RBI announcing open market operation (OMO) sales of G-Secs for Rs 10,000 crore the market saw an unexpected rally yesterday. Bonds too have been rallying for the past few on back of global cues; in the US yields have been falling rather sharply and this has become a global trend.However, for India with crude prices falling very sharply which is a big input for India’s Wholesale Price Index (WPI) and consumer price index (CPI) kept foreign institutional investors (FIIs) attracted to Indian bonds. Also on October 1, Sebi auctioned extra limits that FIIs can buy Indian bonds upto – that also meant that there was a goodish bit of FII buying of Indian bonds. All this took the yields to 8.4 percent.

Also read: 7 reasons G-secs will be a big draw for investors: BoAMLMoreover, the Reserve Bank of India (RBI) announcing OMOs indicates two things; One is that there has been plentiful liquidity, and the RBI has been buying dollars which means it is pumping rupees into the system. It has not wanted the rupee to appreciate much and that also has created rupee surplus which the RBI is trying to suck out. However, more importantly the fact that the RBI announced the OMO yesterday is an indication that it is uncomfortable with yields coming to 8.4 percent. Probably the belief is that under current inflation circumstances with inflation at 7.8 percent the 10-year should be higher than 8.4 percent. It’s also a yield-signal and maybe yields could go back to that 8.42 -8.44 percent levels and move towards 8.45 percent mark.