The Reserve Bank of India (RBI) announced that it will conduct open market operation (OMO) purchases and foreign exchange swaps to ease liquidity in the banking system. As a result, the yield on the 10-year benchmark bond softened to 6.6806%, the lowest level since February 6. The RBI’s move is expected to inject an additional Rs 1.87 lakh crore of liquidity into the system through OMO auctions and a $10 billion dollar-rupee swap auction.
Analysts at Nomura noted that the announcement came as a positive surprise, with the total injection above market expectations. The OMO purchases are expected to alleviate supply pressure and push bond yields lower. The infusion is significant, especially considering there is no supply of central government bonds in March.
Experts predict that the yield on the 10-year benchmark will hover between 6.65% and 6.70% as the RBI has promised to provide liquidity as needed. The RBI’s actions are seen to have driven down yields by buying gilts in the secondary market.
Before the RBI’s announcement, yields had risen, reaching 6.75%, the highest level in six weeks, as the supply of debt papers increased. System liquidity is expected to face pressure in the middle and end of the month as funds move out to make advance tax payments and GST payments. Overall, the RBI’s move is seen as a positive step to stabilize the bond market and maintain liquidity in the banking system.