Bond yields fall on rumours of RBI buyback

Mumbai: Bond yields fell sharply in the government securities market following rumours that the Reserve Bank of India (RBI) would conduct bond purchases or open market operations to bring down the government’s cost of borrowing. A rise in bond prices results in a drop in bond yields.

Meanwhile, the rupee also gained nine paise to close at 77.24 against the dollar, which retreated against major currencies on Wednesday. Yields on the benchmark 10-year government bond had risen to 7.5% last week after the RBI, in a surprise move, hiked the repo rate by 40 basis points (100bps = 1 percentage point) on May 4. The hawkish statement from the regulator also added to the pressure on bond prices.

On Wednesday, the yield on the 10-year bond fell to 7.21% — a drop of 25bps in two sessions. However, yields could rise again as volatility emanating from the US markets following higher-than-expected inflation is also adding to the pressure on bond prices. Market participants are divided on whether the central bank would announce a bond buyback or resort to other measures to increase the appetite for bonds.

Earlier, the RBI had said that the yield curve derived by the one on government bonds across maturities was a ‘public good’ as it served as the basis for the pricing of bank credit. The statement was made when yields came under pressure. The central bank took steps to ensure that yields do not cross 6%. Some feel that with the RBI announcing measures to withdraw liquidity through various measures, including a hike in the cash reserve ratio, buying back bonds would work at cross purposes.

However, others feel that the RBI can do bond buybacks for yield management, and it does not amount to the monetisation of the deficit. In its policy last month, the RBI allowed banks to hold 23% of their deposits in the held-to-maturity category, up from 22%. This encourages banks to buy long-term bonds as they would not be required to make provisions if prices crash subsequently.