 "Bonds")
Government bonds yields surged to hit a seven-month high on Friday after Reserve Bank of India (RBI) Governor Shaktikanta Das said the central bank might conduct open market operations to mop up liquidity.
The central bank has not given any timeline for OMO sales and said it would depend on the ongoing liquidity situation. Market participants said the uncertainty around the time and quantum of OMO auctions aided the panic sale among traders.
“OMO is normally not used as a liquidity management tool. It is used to manage the yield curve. It looks like the RBI’s intention is to get the front end down a little bit. And the longer end may go up because of OMO sales,” said Vikas Goel, managing director and chief executive officer at PNB Gilts Ltd.
Yield on the benchmark 10-year government bond surged by 12 basis points to settle at 7.34 per cent, against 7.22 per cent on Thursday.
The banking system liquidity continues to remain in deficit since September 15 on the back of advanced tax outflows and goods and services tax payments. On Friday, the central bank injected Rs 34,061 crore, according to the data by the Reserve Bank of India.
“What market has probably reacted to is on account of the fact that if they do come up with longer term paper that is something that will put pressure on markets,” treasury head of a private bank said.
During the monetary policy statement, Das reiterated the RBI’s unwavering commitment to achieving the 4 per cent inflation target on a durable basis.
“This OMO sale is a durable liquidity withdrawal. Even now their inflation projection is not showing 4 per cent at all. And if the target is 4 per cent, that means they need to keep policy tight for a very long period,” said Naveen Singh, vice-president, ICICI Securities primary dealership.
“If the current measures don’t work, they might have to do more than this ICRRs or OMOs. They might have to hike rates,” Singh said.
The hawkish tone has led to speculation that the central bank is not done with interest rate hikes.
“The recent vegetable price spike did delay consumer price index (CPI)-based inflation’s march towards to the 4 per cent target. As the RBI’s staff estimates still see CPI averaging at 4.5 per cent in FY25, we continue to see another hike in FY24 accompanied by a change in stance to neutral,” said Aastha Gudwani, India Economist, BofA Securities India.
Some market participants believe the RBI move was to align the domestic yields with global yields.
“The inflation worries are far from over. The global yields are moving higher because of the inflation worries; definitely we also have to align to the global yield level. It may not be inch to inch, but at some point in time we expect our central bank also to align to their levels,” a dealer at a private bank said.
Despite a 46 bp rise in the 10-year benchmark US Treasury bond yield in September, domestic benchmark bond yield only rose by 4 bp in the previous month. As of Thursday, the domestic benchmark bond yield remained flat in October. Meanwhile, the yield on the benchmark 10-year US Treasury note surged by 17 bps.
Robust macroeconomic conditions and the positive impact of inclusion of domestic bonds in the J P Morgan’s emerging market bond index kept the domestic bond market afloat amid global challenges.
