The Reserve Bank of India (RBI), which is determined to check the falling yields in the gilts market, will conduct an open market operation (OMO) auction of Rs 8,000 crore tomorrow. The central bank had only yesterday wrapped up a Rs 6,000 crore auction.
The papers to be auctioned are the 10.95 per cent 10-year for Rs 6,000 crore and 10.18 per cent 25-year for Rs 2,000 crore. The deals will be settled on Saturday.
This is the second OMO auction by the RBI within a week. On November 29, it had auctioned the 11.50 per cent 10-year paper for Rs 2,500 crore, 11.43 per cent 15-year paper for Rs 2,000 crore and 10.18 percent 25-year security. The auction was oversubscribed due to easy liquidity in the system. The RBI yesterday auctioned the 10.71 per cent 15-year paper for Rs 3,000 crore and eight-year floating rate paper for a similar amount.
Gilt prices fell sharply by 75 paise to Re 1 across all maturities after the auction announcement. The 10-year yield went up by 10 basis points to 7.89 per cent after the news.
A primary dealer said: "Market is flush with liquidity because of the deposit growth and dollar remittances. However, the auction announcement signals that the RBI is not comfortable with the low yields, which hurt sentiments." Dealers said that trading in the securities market, which had been thin throughout the day, shrunk further after the announcement.
The Rs 8000 crore auction, however, is likely to be subscribed fully as there is no liquidity strain in the market. A treasury head of a private bank said: "Financial institutions which plan to become universal banks want government papers for the stipulated statutory liquidity requirement. We expect them to pick up a huge chunk from tomorrow's auction."
