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Market avoiding large bets ahead of RBI’s OMO announcement

Market avoiding large bets ahead of RBI’s OMO announcement

14 Jul 2021

By Bhaskar Dutta

Government bonds ended largely steady on Wednesday as investors stayed on the sidelines pending the Reserve Bank of India‘s announcement of the specific papers that it will buy at its next round of open market operations, treasury officials said.

Yield on the 10-year benchmark 6.10 per cent, 2031 government bond settled at 6.11 per cent, unchanged from its previous close. Bond prices and bond yields move inversely.

Bond traders expect the central bank to make the announcement this week or latest by Monday.

In the current quarter, RBI has pledged open market bond purchases worth Rs 1.2 lakh crore under a plan called the ‘Government Securities Acquisition Programme 2.0’.

Of this Rs 20,000 crore worth of sovereign bonds have already been purchased while the next round of acquisition is scheduled for July 22.

The central bank’s largescale bond shopping this financial year comes amid its efforts to keep a lid on sovereign borrowing costs, and by extension, borrowing costs in the broader economy amid the coronavirus crisis.

The central government’s borrowing requirement from the market has ballooned since last year as the economic destruction wrought by the pandemic has hurt revenue streams.

This financial year, the Centre announced bond sales worth a massive Rs 12.06 lakh crore.

In May, the Finance Ministry said it would have to approach the bond market to raise an additional Rs 1.58 lakh crore in order to make up for the likely shortfall in the compensation cess for state governments under the Goods and Services Tax (GST).

With high domestic inflation providing little option for RBI to reduce interest rates, bond purchases by the central bank are essential to ensure the smooth passage of the government’s borrowing programme, the market believes.

While the recently issued 10-year paper was steady, the two most heavily traded securities in the market today – the 5.63 per cent, 2026 bond and the 6.64 per cent, 2035 bond – gained on expectation that the two would be included in the next round of RBI’s bond purchases.

Yield on the 2026 paper fell 5 basis points to close at 5.69 per cent, while that on the 2034 paper declined 2 basis points to 6.75 per cent.

Speculation that the government may defer the additional borrowing on account of the likely GST shortfall also provided some support to the market.

“There are rumours in the market that RBI is not in favour of the extra GST borrowing coming in the form of borrowing through dated securities, as that would distort demand-supply dynamics even further,” a senior treasury official at a large foreign bank said on condition of anonymity.