Riding on the Reserve Bank of India (RBI)’s assurance to conduct open market operations (OMOs) to address the liquidity crunch, government bonds continued their rally for the fourth day, pushing yields to a four-month low.
Yields on the 10-year benchmark, 8.79 per cent government security maturing in 2021 fell to 8.28 per cent on Tuesday, the lowest since August 25 and down five basis points compared to its previous close of 8.33 per cent yesterday. The prices on the same paper firmed up to Rs 103.41 from Rs 103.05 at the previous close.
According to data compiled by Bloomberg, the 10-year benchmark yields have fallen 72 basis points from a three-year high of nine per cent last month.
RBI Deputy Governor Subir Gokarn said OMOs would be announced later on Tuesday, adding the current liquidity tightness was due to advance tax outflows and it was temporary.
“We are expecting an OMO in the range of Rs 10,000-15,000 crore to be announced on Tuesday to ease the liquidity situation,” said a senior official at Union Bank.
RBI resumed open-market bond purchases last month for the first time since January to boost liquidity in the banking system. It purchased Rs 24,300 crore of government debt in auctions over the past month, central bank data show. In recent operations, the central bank had announced OMOs of 10,000 crore each.
“This being the year-ending time for foreign banks, some of these are shuffling portfolios to book profits. Both are driving down yields. The yield on government bonds would move at a narrow band at lower levels,” said a senior Bank of India official.
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The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose seven basis points to 7.73 per cent, according to data compiled by Bloomberg.
Yields on 10-year corporate bonds fell to 9.23-9.25 per cent from 9.25-9.27 per cent on Monday, while those on five-year papers fell to 9.30-9.33 per cent from 9.33-9.36 per cent.
Strong demand from market participants, owing to a feeling that yields on corporate bonds may fall further, also dragged yields down, a dealer said. According to the Fixed Income Money Market and Derivatives Association of India, corporate bonds worth Rs 1,257 crore were traded on Tuesday, compared with Rs 938 crore on Monday.