An upbeat sentiment prevailed, despite Reserve Bank's move to reduce liquidity. RBI raised Rs 7000 crore through two separate GOI auctions at the start and end of the week. The yield curve dipped by 3-10 bps from its previous week's level. The announcement of the first Rs 3000 crore auction of short-maturity GOI saw the yield on the 10-year benchmark (2012, 7.40%) firm up by 3 basis points from its low of 7.17%. But the apex bank setting a slightly higher cut-off price (implying lower yields) resulted in gilt yields move southwards. And the market participants turned into buy mode anticipating that it was RBI last bid to reduce liquidity. The 10-year benchmark gained 7.15% again, only to edge by 3 bps on the news of another RBI sale. But this time, the apex bank sold two long-term securities, but of a higher amount— Rs 4000 crore.
However, RBI disappointed with its view that open market operations (OMO) are targeted at absorbing excess liquidity and stabilising market and there is no relationship between levels of US interest rates and Indian interest rates. Participants expecting a Fed cut and a follow up act by RBI were disappointed. These comments acted as a trigger for selling and security prices went down by 30-40 paise across the curve on the last day.
Comparing the earlier OMO in April and July of the current fiscal, the former had a severe impact, for much higher liquidity then. In April, Rs 30,000 crore was parked in one-day repo and the OMO outflow of around Rs 5,300 crore lead to the benchmark 10-year yield firm up by 15 bps. Subsequent auction of Rs 7,000 crore in July had a much lower impact on the 10-year yield. The reason: markets largely discounted these sales fearing RBI intervention on every yield dip.
Indeed, Rs 7000 crore outflow this week made an impact on the money market liquidity. The overnight call rates ended in the higher range of 5.85% almost after a month and the aggregate amount mopped up in RBI repo auctions fell by a sharp 50% during the week. But at the forex front, the story was different this time. The domestic currency, after opening strong at Rs. 48.70, remained fairly rangebound during the week. The dollar gains abroad coupled with state owned banks intervention and import demand curbed any sharp appreciation.
Outlook
With RBI's move, bonds should gain stability for a while. As the possibility of an unscheduled auction has increased with government's increased short-term borrowings from RBI till August 2. This is besides the scheduled auction worth Rs 8,000 crore slated in the second half of August.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
