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RBI Halts Yield Slide

After many months the RBI finally conducted an OMO for Rs 12,000 crore to suck out excess liquidity. This checked the falling yield across the curve. Overall, in a low trading week, yields moved in a narrow range.

In a short week, yields in the Indian debt market moved in a narrow range. Initially, the drop in inflation and abundant liquidity led the yield on the 10-year benchmark (2013, 7.27%) to touch a low of 5.51 per cent on Monday. But the fear of open market operation (OMO) by the RBI kept market players on the sidelines during mid-week. And when this fear turned into reality, yields inched up across all tenure bonds by the weekend. Overall, the yield on the 10-year benchmark closed the week at 5.53 per cent on Thursday – down 0.02 per cent. However, the market sentiment was weak this week, as trading volumes dipped 10 per cent over previous week.

On Friday, the RBI conducted an OMO of Rs 12,000 crore to suck out the surplus money in the market. While the 12-year and 14-year bonds aggregating Rs 7,000 crore were fully subscribed, the Rs 5,000 crore worth of 17-year bond were not fully subscribed. Reason: the cut-off yield set on the 17-year bond was lower than that on the existing comparable security in the market. That apart, on Wednesday, the government mopped up Rs 1,250 crore through the state government bond auction for four states.

All this had put some pressure on the liquidity front by the weekend. This was widely reflected in the low subscription to RBI repos -- Rs 14,000 crore -- on the auction day (Thursday). The increased size of the treasury bill auction amount from Rs 500 crore to Rs 1,500 crore has also affected the liquidity in the market. Though the daily average subscription to RBI repos remained above Rs 2,000 crore in the remaining trading sessions of the week, it was less than that of the last few weeks. This was despite the inflow of Rs 6,540 crore from coupon payments, and redemption of government securities and treasury bills in the market. The call rates, however, remained below the repo rate of 5 per cent in the 4.8-5 per cent band.

The robust infusion of rupees due to RBI's dollar purchases in the forex market has been the key reason for the ample liquidity in the system. This, in turn, is making the domestic currency stronger against the dollar. This week, the rupee gained another 10 paise to end the week at Rs 45.90/$ on Thursday. Moreover, India's foreign exchange reserves rose to $85 billion in the week ended August 8, 2003 from $84.7 billion a week earlier.

The biggest relief has been the drop in inflation numbers and the recovery in the industrial sector. While inflation fell for the third straight week to 4.09 per cent (for the week ended July 27), the IIP has registered a growth of 5.3 per cent in the first quarter of the current financial year against 4.3 per cent in the last fiscal. These figures are consistent with the GDP growth of 6.5 per cent projected by the government.

The increased size of the treasury bills auction amount and the week's OMO has affected liquidity to some extent. But, with consistent forex inflows, liquidity is likely to be comfortable in the near term. Moreover, the fall in inflation justifies a low interest rate regime, hence supporting further fall in yields. However, one can't rule out another RBI intervention.