Bond yield falls 14 basis points, most in a year, as RBI scraps open market sale plan

Mumbai: Indian 10-year bond yield dropped most in a year on Monday after the Reserve Bank of India (RBI) scrapped plans to sell bonds worth Rs10,000 crore via open market operations (OMOs).

At 11.14am, the 10-year bond yield was trading at 6.905%, down 14.40 basis points, its biggest slide since November 2016, from its previous close of 7.049%. Bond yields and prices move in opposite directions.

“We believe the reversal in RBI’s stance is positive for bond yields and one should see bond yields now heading lower from the current elevated levels. Even as this takes out the near-term worry on yields, pick-up in credit growth will put some upward pressure on bond yields in the medium-term,” Mint reported on Friday, quoting Bank of Baroda note.

The move came after Moody’s Investor Services raised nation’s rating to Baa2, the first upgrade in 14 years, from the lowest investment grade of Baa3 and changed the outlook from stable to positive.

“In view of the recent market developments and based on a fresh review of the current and evolving liquidity conditions, it has been decided to withdraw the open market sale operations scheduled for November 23, 2017,” the central bank said on Friday in a statement.

So far this fiscal, RBI has sold bonds worth Rs90,000 crore through OMOs in a bid to absorb excess liquidity from the banking system.

The liquidity in the banking system increased at over Rs5 trillion due to Prime Minister Narendra Modi’s last year’s decision to scrap Rs500 and Rs1,000 banknotes. Since demonetisation till August, bond yield fell sharply by 50 basis points.

As of Friday, the surplus cash at banks dropped to Rs583.50 billion from more than Rs5 trillion in March, according to RBI data.

Since August, bond yield started rising due to the concerns of fiscal slippages, surge in international crude oil prices which may lead to higher inflation. Also, most of the analyst believes that the RBI may not cut rates this year and US Federal Reserve may hike rates in December policy, dampening sentiment.