Bond yield hits fresh 8-month low as RBI signals more OMO purchases
At 9.15am, the 10-year government bond yield was trading at 7.407%—a level last seen on 13 April, from its previous close of 7.441%
Mumbai: The 10-year government bond yield on Thursday opened 3 basis points lower to hit a fresh 8-month low after the Reserve Bank of India assured that it will continue to increase bond purchases through open market operations (OMO) to provide liquidity till March-end. At 9.15am, the 10-year government bond yield was trading at 7.407%—a level last seen on 13 April, from its previous close of 7.441%. Bond yields and prices move in opposite directions.
“The announcement of continued open market operations to inject liquidity would complement the impact of the recent decline in the US 10-year yield and some stabilisation in crude oil prices at a moderate level” said Naresh Takkar MD & Group CEO of ICRA Ltd. Takkar expect the 10-year G-sec yield to trade in a band of 7.3-7.7% in the remainder of this quarter.
RBI injected durable liquidity amounting to Rs 360 billion in October and Rs 500 billion in November through open market purchase operations, bringing total durable liquidity injection to Rs 1.36 trillion for 2018-19. Liquidity injected under the LAF, on an average daily net basis, was Rs 560 billion in October, Rs 806 billion in November and ₹105 billion in December (up to December 4).
RBI has kept its interest rates unchanged for second straight meeting and lowered its inflation projection sharply to 2.7-3.2% from 3.9-4.5% for the second half of 2018-19, taking into account the fall in food inflation, crude prices and appreciating rupee. It expects inflation to rise to 3.8-4.2% in the first half of 2019-20.
RBI also commented that that if upside inflation risks do not materialise, there is a “possibility of space opening up for commensurate action”. Brokerage firm Nomura Research belives that this acknowledges a possible change in stance (back to neutral) and a reversal in policy rates.
“We do not expect upside risks to materialise and expect lower inflation and the weaker growth outturn to result in a change in policy stance back to ‘neutral’ in early 2019, either in February or at the April policy review. We think the continued undershoot in food price inflation, a likely growth slowdown (which will lower core inflation) and a sharp correction in oil prices – all point to the future policy path leading towards dovishness and possibly easing, rather than the unidirectional hike that the current ‘calibrated tightening’ stance suggests”, Brokerage firm Nomura Research added.
Care Rating expect that if the inflation moderates further there is a case for rate cut and the stance of the monetary policy can be changed to neutral. It also expecting that the GSec yields will be in the region of 7.5%.
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