RBI to conduct bond purchases for Rs 20,000 crore; yields fall

The Reserve Bank of India will aim to purchase up to Rs 20,000 crore worth of government bonds via open market operations on Wednesday, the central bank said in a release Monday morning. The move pulled yields down by five basis points with the benchmark gauge trading at 6.03 per cent.

When bond yields fall, prices rise.

“On a review of current liquidity and financial conditions, therefore, the Reserve Bank has decided to conduct purchase of Government securities under Open Market Operations (OMO) for an aggregate amount of ₹20,000 crore on February 10, 2021,” it said.

In its Monday edition, ET wrote that the RBI was set to buy bonds through a combination of OMOs and secondary market transactions.

Four sets of sovereign papers are included in the proposed purchase plan with residual maturities ranging from four to 14 years.

Yields on benchmark government bonds had risen as much as 24 basis points since January 31, the day before the Budget was presented. Last Friday, when RBI Governor Shaktikanta Das said the cash reserve ratio for banks would go back up by a percentage point in a staggered manner, yields jumped as much as seven basis points. A basis point is 0.01 percentage point. It closed at 6.08 per cent Friday.

A rising yield adds to the federal funding costs, which, in turn, percolates down to corporate bond yields as well.

Although the governor made an explicit forward ‘guidance on liquidity’ assuring ample supply of funds, investors assigned more weight to ‘normalisation.’

The fallout was felt in the bond auction on Friday, with the RBI managing to raise only Rs 190 crore of the intended Rs 31,000 crore. In a rare event, it did not even devolve two sets of bonds on primary dealers, either. They could be carried forward this week, which may put an even heavier burden on yields.

It may buy as much as Rs 4 lakh crore in OMOs or even raise it next fiscal and banks with their extended March 23 deadline on held-to-maturity category bonds would have room to buy Rs 4 lakh crore worth of government bonds, ET wrote.

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