India’s benchmark bond yield rose on Friday to a three-week high as a lack of an open market operation announcement disappointed investors ahead of a debt sale and variable rate reverse repo auction later in the day.
The Reserve Bank of India last week said it would conduct a variable rate reverse repo auction for 2 trillion rupees ($27 billion) on Jan. 15 on review of the evolving liquidity and financial conditions.
“It has been decided to restore normal liquidity management operations in a phased manner,” the RBI said.
Markets read the release as an indication that the RBI was looking to roll back the massive cash surplus in the banking system despite its reiteration that it will ensure availability of ample liquidity.
“The market is confused about what the RBI is trying to do. A lot of times it feels like the RBI doesn’t realise the fallout of its actions and then tries to balance it out,” said a senior debt trader at a private bank.
The benchmark 10-year bond yield was trading at 5.95% versus 5.93% on Thursday and off the day’s high of 5.96% – its highest since Dec. 24.
Traders said the absence of a special OMO announcement for next week after three consecutive weeks of such auctions also dented demand for bonds, adding that they expected yields to rise further if there was no announcement by end of day.
Results of the 220 billion rupees worth bond sale and the variable reverse repo rate cut-off will be also monitored.
“The RBI has taken the first step towards reverting to pre-COVID liquidity management operations in a phased manner,” Upasna Bhardwaj, economist at Kotak Mahindra Bank, wrote in a recent note.
“The rate up to which the RBI will be comfortable accepting bids in the variable rate reverse repo auction will provide a key signal on its intent and, consequently, the interest rate trajectory.”
