FPIs buy $1.2 billion in bonds in a single day

The bond market is buzzing with activity even as yields look relatively stable. Foreign investors are increasing their exposure to local bonds, mainly on the corporate bond side, while public sector banks (PSBs) have become massive sellers of government bonds in the market, booking profits after yields fell about 10 basis points in a week.

The yield on the 10-year bond stood at 6.46 per cent on Wednesday, from 6.56 per cent at the start of the month. According to the National Securities Depository data, foreign investors bought $1.2 billion equivalent (~7,853 crore) in Indian debt paper, on Tuesday, highest since April.

At the same time, the data from Clearing Corporation of India showed PSBs, on Monday, had sold ~1.02 lakh crore, and private banks sold ~2,348.4 crore in government bonds. Foreign banks bought ~48,954 crore of the bonds that day.

Dealers say local banks were booking profits, expecting bond yields to rise, considering the Reserve Bank of India (RBI) doesn’t look too pleased with the soft yields. The central bank sold ~6,036 crore of bonds in the secondary market through its open market operations (OMOs). It has announced another round of OMO sales of ~10,000 crore on July 20. Going forward, the dealers expect the central bank to sell another ~20,000-crore worth of bonds.

According to bond dealers, the whole purpose of the OMO sales, which would suck out liquidity from the banking system, was yield management. Such OMO sales increase the supply of liquid bonds in the market and lead to a fall in prices, which push up the bond yields.

Even as the central bank’s official stance is not to manage yields or currency level, it does frequently intervene in these markets through its own set of mechanism.

“Globally, the central banks are unwinding their positions and interest rates are rising. The RBI, meanwhile, is still under pressure to cut rates. This narrows the interest rate differential and leads to outflow of funds. The central bank won’t like it, and therefore, there is some amount of yield management going on,” said a senior currency dealer.

However, with retail inflation hitting a record low of 1.54 per cent for June, bond yields could stay at low levels for a longer time, signalling expectations of a rate cut. The RBI hopes to keep inflation under four per cent in the medium term.