MUMBAI (Reuters) – India’s benchmark bond yield saw its biggest weekly gain in four months following the Reserve Bank of India’s decision to restore liquidity operations to normal, while the absence announcement of a special open market operation for next week also hurt.
The Reserve Bank of India announced last week that it would hold a floating rate reverse repo auction for 2,000 billion rupees ($ 27 billion) on January 15 after a review of the development of liquidity and financial conditions.
Markets read the statement as an indication that the RBI was seeking to reduce the banking system’s huge excess liquidity, despite its reiteration that it will ensure the availability of abundant liquidity.
“The market is confused as to what the RBI is trying to do. Often it feels like the RBI doesn’t realize the fallout from its actions and then tries to balance it out, ”said a senior trader at a private bank.
The benchmark 10-year bond yield ended at 5.99% from 5.93% on Thursday, its first of three weekly increases and its largest since the week ending September 11.
Traders said the lack of a special OMO announcement for next week after three straight weeks of such auctions has also hurt demand for bonds. They said they expected yields to rise further if there was no announcement by the end of the day.
The government raised 224.55 billion rupees through a bond sale while the central bank set a threshold of 3.55% in its 14-day floating rate reverse repo auction.
Traders said the payoff point was high, but tracking auctions and consistency of RBI actions would be critical for it to make a real difference.
“The RBI has taken the first step towards a gradual return to pre-COVID cash management operations,” Upasna Bhardwaj, an economist at Kotak Mahindra Bank, wrote in a recent memo.
“The rate at which the RBI will be comfortable accepting bids in the floating rate reverse repurchase auction will provide a key signal on its intention and, therefore, the trajectory of interest rates. “
($ 1 = 73.0550 rupees)
Reporting by Swati Bhat; edited by Subhranshu Sahu, Larry King