Bonds rise on RBI plan to boost liquidity through open market buys

RBI took this step to ensure adequate cash conditions in the banking system

Indian sovereign bonds posted sharp gains on Tuesday after the Reserve Bank of India (RBI) said it will buy bonds through open market operations (OMO) in two days' time, to ensure adequate cash conditions in the banking system.

The benchmark 10-year bond yield fell as much as 6 basis points to its lowest in nearly seven years at 7.11 per cent, while the present benchmark bond 2026 yield hit its life-low.

"With a view to further front-loading the provision of liquidity, it has been decided to conduct an open market purchase auction on August 11, 2016," RBI said in the policy document.

 

Details of the bond buy will be released later, the RBI said.

"Guidance on liquidity and announcement of OMO simultaneously is a quick and clear message," said Vijay Sharma, senior executive vice-president, PNB Gilts Ltd, New Delhi.

Sharma expects the 10-year bond yield to fall close to 7 per cent by month-end.

Cash conditions in the banking system tightened somewhat after the government's indirect tax payments, which traders said led to outflows worth 500 billion rupees ($7.47 billion).

At 0653 GMT, the 2026 bond yield was changing hands at 7.12 per cent, down 5 basis points from its previous close.