RBI’s intervention drives down 10-year bond yields to 6% level

The central bank bought the 10-year bonds at 50 paise above the prevailing rate, and brought down the yields from 6.08 per cent to 6 per cent mark.

The Reserve Bank of India (RBI) on Wednesday in a way forced the bond market to accept its will by driving down the 10-year bond yields to the 6 per cent mark once again by giving a strong rate signal at the open market operations (OMO) auction.

Out of the Rs 20,000 crore the central bank wanted to buy from the market through four securities, the RBI bought Rs 14,654 crore in the 10-year segment alone.

While completely leaving out a bond maturing in 2028, and buying Rs 2,040 crore and Rs 3,306 crore in the 2024 maturity and 2034 maturity respectively.

The market offered bonds worth Rs 89,234 crore for the Rs 20,000 crore OMO.

On Thursday, the RBI will be auctioning Rs 22,000 crore of bonds in a special auction, and another Rs 26,000 crore on Friday as part of the regular auction.

The cut-off of the 10-year bond was at 6.0034, a result of RBI buying the bonds at more than the prevailing market rate.

The central bank bought the 10-year bonds at 50 paise above the prevailing rate, and brought down the yields from 6.08 per cent to 6 per cent mark.

The 10-year bond yields closed at 6.0096 per cent.

“Generally, OMOs purchases are equally distributed across securities. By doing disproportionate buying, RBI is giving a strong yield signal that it wants to maintain the 10-year at 6 per cent,” said Debendra Dash, head of asset-liability management at AU SFB.

According to bond market participants, the central bank may have intervened in the secondary market too by buying bonds anonymously from there as well.

The bond market participants, for sure, have got the message.

“RBI’s action today caught everyone by surprise. This is as loud a yield management signal as there can be,” said a senior bond dealer requesting anonymity.

The bond market is convinced now that the central bank will not tolerate above 6 per cent yields for the 10-year bonds, both in this financial year, and possibly in the next year as well, no matter the borrowing size.

The market has also taken comfort that the RBI will be there to bring down the yields by doing whatever is needed.

The centre will be borrowing Rs 12 trillion in the next fiscal and said it would borrow Rs 80,000 crore extra from the markets this fiscal.

However, the bond market participants say the RBI seem to be solely focused on the 10-year segment, while other yields continue to remain high.

However, once the 10-year is under control, the central bank will likely focus on other bonds, dealers say.

Photograph: Francis Mascarenhas/Reuters

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