Yields shoot up on RBI’s open market sale plan

Yields on 10-year government bonds jumped 11 basis points on Monday, after the Reserve Bank of India (RBI) announced late on Friday its bond purchase plans from the secondary market.

The announcement came as a surprise for the market, as traders were expecting any such move to come only by August. But observers say it shows the RBI is keen on maintaining interest rate parity between the US yields and local yields, so that inflows remain unaffected.

The sharp rise in yields in the US led to a prompt response from the RBI, which announced open market operation (OMO) for sale of government bonds up to ~10,000 crore. The benchmark 10-year US yields had swung to 2.31 per cent by mid-day trading on Friday. Its Monday’s closing was at 2.14 per cent.

According to bond traders, the move was done knowing fully well that domestic yields would spike.

“Ample liquidity is likely to intensify in July and August due to seasonality. This, along with a sharp bounce back in global yields, might have prompted the RBI to announce OMO sales,” said Soumyajit Niyogi, associate director at India Ratings and Research.

The yields on the 10-year bond rose 6.62 per cent in intra-day trade, but closed at 6.55 per cent. On Friday, the bonds had closed at 6.51 per cent. In the near term, smooth implementation of the goods and services tax might take precedence over global factors for bonds.

Notwithstanding the uptick in rates, the private corporate sector is warming up to the bond market.

According to a Thomson Reuters review of the debt capital market, primary bond offerings from local issuers totalled $36.5 billion in the first half of 2017, up 57.1 per cent from the year-ago period. This is the highest in a first-half period since 2013 in terms of proceeds.