At the same time, the data from Clearing Corporation of India showed PSBs, on Monday, had sold Rs 1.02 lakh crore, and private banks sold Rs 2,348.4 crore in government bonds. Foreign banks bought Rs 48,954 crore of the bonds that day.
Dealers say local banks were booking profits, expecting bond yields to rise, considering the Reserve Bank of India (RBI) doesn’t look too pleased with the soft yields. The central bank sold Rs 6,036 crore of bonds in the secondary market through its open market operation (OMO). It has announced another round of OMO sales of Rs 10,000 crore on July 20. Going forward, the dealers expect the central bank to sell another Rs 20,000-crore worth of bonds.
According to bond dealers, the whole purpose of the OMO sales, which would suck out liquidity from the banking system, was yield management. Such OMO sales increase the supply of liquid bonds in the market and lead to a fall in prices, which push up the bond yields.
Even as the central bank’s official stance is not to manage yields or currency level, it does frequently intervene in these markets
through its own set of mechanism.
“Globally, the central banks are unwinding their positions and interest rates are rising. The RBI here, meanwhile, is still under pressure to cut rates. This narrows the interest rate differential and leads to outflow of funds. The central bank definitely won’t like it, and therefore there is some amount of yield management going on,” said a senior currency dealer, who did not wish to be named.
However, with retail inflation hitting a record low of 1.54 per cent for June, bond yields could stay at low levels for a longer time, signalling expectations of a rate cut. The RBI hopes to keep inflation under four per cent in the medium term.
“The consistent undershooting of the Consumer Price Index target of the RBI opens up the possibility of a further easing,” said Ram Kamal Samanta, vice-president treasury at SBI DFHI.
However, he said, at the current yields, most of the rate cut expectations had been priced in and there is little chance of yields moving significantly from the present levels.