Bonds jump most in a yr after RBI cancels OMO debt sale

Sovereign bonds rose the most in a year in India after the central bank scrapped a debt sale due later this week that was designed to reduce banking liquidity.

The Reserve Bank of India won’t proceed with a ~10,000 crore auction under its openmarket operations (OMOs) on Thursday after a review of liquidity conditions, it said after the market closed on Friday. The central bank has auctioned ~90,000 crore of the securities since the start of July.

India’s government bonds have slumped since August due to a potential end to monetary easing, concern about rising supply and possible fiscal slippage. They jumped at the start of trading on Friday when Moody’s Investors Services upgraded the nation’s sovereign rating, only to reverse direction and end the day almost flat.

“With supply pressures easing off a bit as state bond supply is lower than expected this week, and the OMO sales getting cancelled, bond markets have witnessed a smart bounces back,” said Sandeep Bagla, associate director at Trust Capital Services in Mumbai. “Domestic surplus liquidity has been reducing steadily over the past few weeks and is expected to come down more in the next three to four months.”

Surplus cash at banks dropped to ~58,350 crore as of Friday, according to the Bloomberg Intelligence India Banking Liquidity Index. That’s down from more than ~5 lakh crore in March after bank deposits surged following Prime Minister Narendra Modi’s unexpected decision to scrap ~500 and ~1,000 banknotes in November 2016.

India’s government bonds have slumped since August due to a potential end to monetary easing, concern about rising supply and possible fiscal slippage

RBI signal

The yield on the benchmark 6.79 per cent bond due in 2027 dropped 16 basis points to 6.8 per cent on Monday, the biggest fall in a year. It climbed to 7.10 per cent on November 16, the highest since September 2016. Traders said the decline was also due to the OMO cancellation being perceived as a signal from the central bank.

“The market is taking it as a signal from the RBI that, quite possibly they were not very comfortable with the absolute levels of the yield and the pace at which the yields were going up,” said Vijay Sharma, executive vice president for fixed income at PNG Gilts in New Delhi. The RBI may not do further sales under its open market operations, he said.

The rupee slid 0.1 per cent to 65.09 to a dollar, after gaining 0.5 per cent Friday after Moody’s upgrade.