Yields on government bonds may soften further in opening trades. This will be more due to the sobering effect of the Reserve Bank of India’s (RBI’s) “discomfort” over the sharp rise in yields. The RBI had on Friday rejected bids placed for the purchase of bonds, making it obvious that it was not at all comfortable with the hardening of yields.
The market will wait for clues from the RBI, which will conduct open market operation (OMO) auction to buy back 10-year paper (8.24 per cent 2018) worth Rs 10,000 crore. This is the most traded paper and the anchor security in the yield curve.
If the central bank picked up securities at a lower yield level, say at 6.5 per cent, the market yield would come down across the spectrum (bonds with different maturities), said a bond dealer with a public sector bank. The 2018 paper had closed at 6.80 per cent yield on Friday against 7.17 per cent on Thursday.
The RBI will buy more government bonds worth Rs 10,000 crore through another OMO auction on Thursday. The market is highly bearish due to the huge government borrowing to fund the sharp rise in expenditure. The demand in the market has been drying up in the past few weeks on massive supply of bonds from Central as well as state governments.
LIQUIDITY
The outgo on account of the last instalment of advance tax payments (of around Rs 25,000 crore) is not expected to put much pressure on resources in the week. There is a comfortable liquidity in the system. This is quite evident from the fact that banks are parking large amounts with the RBI under the reverse repo window of liquidity adjustment Facility (LAF). The central bank is absorbing over Rs 40,000 crore daily under LAFAlso, the RBI will infuse Rs 20,000 crore through OMO operations. Even with this, if there is a feeling that liquidity is under pressure, the RBI has the option to cut the cash reserve ratio (CRR), a portion of deposit that banks place with it, to release additional resources. This is crucial to ensure adequate liquidity in the last fortnight of the financial year, according to the head of a public sector bond house.
Interest rates for borrowing in overnight interbank market are hovering around or below the reverse repo rate of 3.5 per cent.
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RUPEE
The Indian rupee is expected to take opening cues from the movement in Asian share markets. If share markets globally continue their rally, banks may sell dollars, anticipating more inflows from foreign funds, which may lift the rupee.
The greenback’s movement against major units and Asian currencies is also likely to provide direction to the rupee, which appreciated by 0.35 per cent last week to around 51.51 as the Sensex gained a huge 5.2 per cent during the period.