The yield on the benchmark 10-year bond softened to 6.6806% on Thursday, the lowest level since February 6 (6.656%), compared with its previous close of 6.7087%, after the Reserve Bank of India announced open market operation (OMO) purchases and foreign exchange swaps to ease liquidity.
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The central bank on Wednesday announced that it will conduct OMO purchases and a $10-billion dollar-rupee swap auction that together are expected to inject an additional liquidity of Rs 1.87 lakh crore into the banking system. The OMO auctions will follow Rs 1.4 lakh crore of bonds purchased by the central bank over the previous OMO auctions.
The response to the previous auctions was reasonably good as banks willingly offloaded bonds from their HTM (hold-to-maturity) books to book profits.
Analysts at Nomura said the announcement of Rs 1 lakh crore of OMO auctions, to be held on March 12 and 18, together with the dollar/rupee buy-sell swap auction of $10 billion on March 24, has come as a positive surprise. “The total injection of Rs 1.87 lakh crore is above market expectations,” they wrote. “OMO purchases will elevate the supply pressure coming from SDLs and push bond yields lower, “they added.
The infusion is significant considering there is no supply of central government bonds in March.
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Experts said the yield on the 10-year benchmark is expected to hover between 6.65% and 6.70% as the RBI has promised to provide liquidity as and when required. They believe the RBI has bought gilts in the secondary market, driving yields down.
Ahead of the RBI’s announcement, yields moved up topping 6.75%, the highest levels in six weeks, as supply of debt papers increased. System liquidity is expected to face some pressure towards the middle and end of the month as funds move out on account of advance tax payments and GST payments.
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