“After the OMO, state government auction calendar came, which showed states would be borrowing some Rs 25,000 crore extra in the next three months. This spooked the market,” said the head of treasury of a bank.
Last week, the RBI
had bought its full quota of 10-year bonds, but sold just Rs 6,825 crore in aggregate of short-term bonds maturing in the next year. According to a senior bond dealer, the yields rose after the OMO was done to reflect the fundamentals and to reflect the fact that yields needed to be higher when there is a clear fear of at least Rs 50,000 crore of extra borrowings coming before the close of the financial.
“The OMO announcements brought down yields from 6.75 per cent to 6.55 per cent. You cannot expect the yields to go down even further considering that the RBI
had pause in December,” said the bond dealer.
If there is further OMO announcement, the bond yields will likely fall temporarily. The yields fall as prices rise. The lower yield helps the government to borrow cheaper.