The government securities market witnessed heavy buying demand from foreign and private sector banks that generally act as custodian banks for foreign institutional investors (FIIs).
“The banks received foreign investments worth $800 million-$1 billion last week for investing in the equity market. However, with the marginal rise in crude prices and falling global equity markets, equity market investments are being temporarily routed to debt instruments”, said a dealer.
While the volumes in the government securities market moved up to around Rs 4000 crore, the yield on the benchmark ten-year paper fell from 9.32 per cent to 9.19 per cent.
The prices of government papers went up by 30-35 paise across maturities, due to their comparatively cheaper prices and heavy trading activity by primary dealers intent on pulling down the yields and bringing down the borrowing costs.
The government will auction two papers - 7.95 per cent 2032 and 8.24 per cent 2018 on August 8 to raise Rs 10,000 crore. If the rally continues, the yield on the ten-year may reach 9.05 per cent, said a dealer.
Meanwhile, the market also witnessed brisk trading in the overnight interest rate swap market, where banks strike deals for receiving floating rate of interest and pay fixed rate of interest.
The yields across maturities, ranging from the three-month OIS to five-year OIS has come off by 10-40 basis points. According to dealers, the liquidity is not expected to remain tight despite the increase in policy rates, primarily due to foreign exchange inflows.
According to the data released by the Securities and Exchange Board of India (SEBI), the foreign institutional investors sold equity worth $1.6 billion as against $16 million in the debt market. After the monetary policy review on July 29, the debt market has seen only purchases, said a dealer.
Overnight interest rate (OIS) swap market is a derivative product based on the underlying of interest rate on the government securities. A bank buys a government security at a fixed rate of interest. The risk of interest rate liability accruing from a fixed rate is offset by a reverse transaction in the OIS market.
