Nudged by markets, RBI accepts yields at near-market level in OMO

Since August, the central bank has tried to keep the 10-year yields below 6 per cent.

The Reserve Bank of India (RBI) seems to have reconciled to the fact that higher yields are here to stay, as it bought bonds at near-market rates after many months. 

The central bank conducted a special open market operation (OMO), in which it bought Rs 20,000 crore of long-term bonds, maturing between 2025 and 2033, and sold Rs 15,000 crore of bonds maturing between 2021 and 2022. Included in the purchase was the benchmark 10-year bond, which the central bank bought at 6.1778 per cent, and it closed at 6.2469 per cent after the OMO.  

On Wednesday, the RBI also announced another special OMO for March 18, in which it will buy and sell Rs 10,000 crore in each leg from the secondary market.  

Since last August, RBI has tried to keep the 10-year yields below 6 per cent. It did not hesitate to devolve auctions on the underwriters, or even cancel OMOs or primary auctions when the markets demanded higher yields. When the OMO was conducted, yields were reportedly at around the cut-off. This may indicate that the market is pushing RBI for more concessions on yields at a time when the central bank has come out of its 6 per cent tolerance band, say experts. 

Bond market experts say the acceptance of higher yields was perhaps not out of sync with what is happening globally.

“In emerging markets like Thailand, Malaysia, and Indonesia, yields have hardened by 60 basis points or so. The bond yields cannot remain soft if left to the market,” said Gopal Tripathi, head of treasury at Jana SFB.  

However, the central bank’s power to bring down yields near the end of the financial year should not be discounted.

“RBI has enough tools to soften the yields near the year-end, otherwise there may be heavy losses in banks’ treasury books,” said Tripathi.

For the majority of financial year 2020-21 banks have bought the 10-year bond at around 6 per cent. If the yields close significantly higher than that, treasuries will incur losses. To that effect, RBI can announce a massive OMO towards the end of the month, which would rapidly reduce yields temporarily. But this would be an intervention to save banks. At some level, saving investors in local bonds also becomes important for RBI because it has to sell Rs 12 trillion in bonds in the next financial year. If banks can’t cut losses, they won’t be buying those bonds, bond dealers say.  

Part of that effort was seen in Wednesday’s OMO purchase. In the past few auctions, primary dealers had to buy the bonds. Through OMO, RBI seemed to have given them an avenue to square off their losses.  

According to an official with a primary dealer, it is not correct to assume that RBI has a target in mind. It may not be that the central bank wants to keep yields at 6 per cent, but its target is the orderly evolution of the yield curve.  

However, yields seem to be relatively soft in the key benchmark segments, such as the 10-year G-Sec. The bond maturing in 2029 closed at 6.5962 per cent, partly because it was illiquid in the market.  

The relatively higher cut-off in the OMO could also be the result of market behaviour, where bidders looked to cut losses, instead of booking profits.  

“It’s a prisoner’s dilemma, while a section of market was expecting aggressive cut-off, another section had taken the opportunity to lighten its position even if at a break-even yield. OMO facilitates market liquidity too, which allows investors to sell large chunks that wouldn’t have been possible amid adverse market conditions,” said Soumyajit Niyogi, associate director at India Ratings and Research.