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Business News/ Markets / Stock Markets/  India's bond yield posts biggest single-day jump in 17 months; What's fuelling the rise?
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India's bond yield posts biggest single-day jump in 17 months; What's fuelling the rise?

The 10-year yield rose to 7.3645 per cent, with the 15 basis points increase its biggest single-session rise since May 4, 2022.

Representative image. Photo: iStockphotoPremium
Representative image. Photo: iStockphoto

India's benchmark 10-year bond yield posted its biggest one-day jump in 17 months on Friday, October 6, with the overall bond yields expected to rise further, on open marker sales of bonds through auctions. The 10-year yield rose to 7.3645 per cent, with the 15 basis points increase its biggest single-session rise since May 4, 2022. One basis point is one hundredth of percentage point.

The surge is bond yields came after the Reserve Bank of India (RBI) unveiled its monetary policy committee (MPC) decision earlier today, where the RBI Governor kept the benchmark repo rate steady at 6.50 per cent for the fourth consecutive time this year.

Also Read: Bond yields spike amid bets of interest rates staying higher for longer; how will it impact Indian stock markets?

Why are Indian bond yields rising?

-The surge in bond yields came after RBI Governor Shaktikanta Das said, while announcing monetary policy, that the central bank plans to auction bonds through open market operations (OMO) to manage liquidity. OMO is a term which refer to purchase or sales of government securities in the open market by the RBI.

-The RBI Governor added that the timing and quantum of such operation will depend upon evolving liquidity conditions. The OMO sales will be done through auction process, and timing and quantum of such operation will depend upon evolving liquidity conditions, according to Das.

-The banks having excess liquidity have been less unwilling to lend to lower quality credits and instead taking much lower yields by depositing at the RBI's overnight standing deposit facility. Hence, the central bank wants to correct the situation.

-The central bank's aim is to shrink excess liquidity and encourage smoother interbank lending. The large scale sales of government paper is a negative for bonds as liquidity is set to tighten, noted market observers.

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The RBI has been selling bonds through screen-based operations for the past few weeks, to drain additional liquidity, since it started phasing out incremental cash reserve ratio. The central bank sold bonds worth 71 billion in four weeks to September 22, according to a report by news agency Reuters.

Possibility of OMO sales to weigh on bond markets

The RBI does not currently plan to give a calendar for the sales and that uncertainty over the timing of these, said economists, will dominate sentiment and keep the bond yields elevated.

‘’The RBI surprised markets by mentioning the possibility of OMO sales to manage liquidity. Though liquidity conditions are likely to ease in the near term amid the reversal of the I-CRR funds (on October 7) and government spending, the CIC leakage in the upcoming festive season and intermittent FX intervention are likely to counter the impact,'' said Kotak Institutional Equities.

‘’We do not see a need for aggressive OMO sales in the near term, as liquidity conditions should turn only marginally positive, with the overnight rates likely remaining near the MSF rate,'' said the brokerage.

‘’However, the RBI may prefer to use OMOs to keep bond yields higher to avoid financial instability from the narrowing of interest rate differentials with DMs. We now expect the benchmark 10-year G-sec yield in the range of 7.25-7.50 per cent over the near term,'' it added.

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Published: 06 Oct 2023, 04:30 PM IST
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