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The 10-year bond yield fell 8 basis points to 5.937% - a level last seen on 4 September. Bond yield and prices move in opposite directions. (Photo: Mint)
The 10-year bond yield fell 8 basis points to 5.937% - a level last seen on 4 September. Bond yield and prices move in opposite directions. (Photo: Mint)

Bond prices rally as RBI to double OMO purchase size

  • RBI on Friday kept repo rate, the key interest rate at which it lends to commercial banks, unchanged at 4%. It sounded an ominous note on India's growth outlook, even as it pretty much echoed what rating agencies have warned about

MUMBAI: India government bond prices rallied on Friday after the Reserve Bank of India (RBI said it will double the purchase size under its open market operations and also use the tool for state bonds as a special case.

The 10-year bond yield fell 8 basis points to 5.937% - a level last seen on 4 September. Bond yield and prices move in opposite directions.

Among shorter tenure bonds, the three-year bond yield slumped 16 basis points, while four- and five-year bond yields declined 8 basis points each.

The Indian rupee rose 0.12% to 73.15 to a dollar.

RBI said it will maintain comfortable liquidity and will conduct market operations in the form of outright and special open market operations. "In response to feedback from market participants, the size of these auctions will be increased to 20,000 crore. It is expected that the market participants will respond positively to this initiative," said governor Shaktikanta Das.

"The policy was a pause with a decisively dovish guidance. The central bank ticked many boxes in one go, as the pause on rates was balanced by assurances that the stance will stay accommodative for an extended period of time, perceiving the current phase of inflation as supply-driven and thus transient", said Radhika Rao economist at DBS Bank.

"Liquidity support for bond markets - Centre as well as state bonds – will be timely, helping to keep a lid on risk-free yields and by extension borrowing costs", Rao added.

Das also said that the central bank will introduce on-tap targeted long-term repo operations (TLTRO) for banks to borrow up to Rs1 trillion from the window and invest in corporate bonds and other debt instruments of certain sectors. The on-tap TLTROs will have tenors of up to three years at a floating rate linked to the policy repo rate and the scheme will be available up to 31 March, 2021.

RBI on Friday kept the repo rate, the key interest rate at which it lends to commercial banks, unchanged at 4%. The central bank sounded an ominous note on the growth outlook for the country, even as it pretty much echoed what rating agencies have also warned about earlier.

The RBI's MPC has pegged the real GDP growth for FY21 to contract by 9.5%.

The decision to keep the interest rates unchanged is in line with market expectations as inflation has remained above 6% - the higher end of the central bank’s medium-term target.

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