Bond market builds up OMO expectations

The bond market is expecting substantial amount of secondary market bond purchases by the Reserve Bank of India (RBI) to cool down yields and enable the government to sail through the record ~12-trillion borrowing programme.

The RBI buys or sells bonds from the secondary market through its open market operations (OMOS). So far this fiscal year, the RBI has bought about ~1.14 trillion of bonds from the secondary market, most of them unannounced. This could be termed as indirect monetisation, something that the RBI could have done to resort to more in this fiscal year, say bond dealers.

Bond yields spiked on Friday by 9 basis points, and the dealers wanted higher yield for the 10-year securities on offer in the weekly auction. The RBI refused to oblige and ~4,637.93 crore of the ~18,000-crore auction remained unsold. The cut-off yield in the auction came at 5.96 per cent, against its coupon of 5.77 per cent.

So far this fiscal year, the Centre has raised ~5.84 trillion from bonds market. “The devolvement at the auction on Friday is a sign of investor ‘fatigue’, and the markets’ appetite for further supply will be limited, in the absence of some RBI support,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance.

“With US yield up and higher-than-expected CPI market have given hope on October cut, market will now look for support from RBI in form of OMO,” said Jayesh Mehta, head of treasury of Bank of America.