Bond market expects massive OMO to help govt meet Rs 12 trn borrowing goal

So far this fiscal, the government has raised Rs 5.84 trillion in bonds from the market | Illustration: Ajay Mohanty
The bond market is expecting substantial amount of secondary market bond purchases by the Reserve Bank of India (RBI) to cool down yields and enable the government to sail through the record Rs 12 trillion borrowing programme.

The RBI buys or sells bonds from the secondary market through its open market operations (OMO) programme. While the OMOs are largely announced, the central bank also buys bonds unannounced. So far this fiscal, the RBI has bought about Rs 1.14 trillion of bonds from the secondary market, most of them unannounced. This could be termed as indirect monetization, something which the central bank could have to resort to more in this fiscal, say bond dealers. Such purchases lower the yields, or boost the price of the bonds, and the government, the issuer, gets to borrow at a cheaper rate.

Bond yields spiked up on Friday by 9 basis points, and the bond dealers wanted higher yield for the 10-year securities on offer in the weekly auction. RBI refused to oblige to the market and Rs 4637.93 crore of the Rs 18,000 crore 10-year bond auction remained unsold. The cut-off yield in the auction of this bond came at 5.96 per cent, against its coupon of 5.77 per cent. The bond was launched a fortnight back and replaced another 10-year bond that was the benchmark for just three months.

So far this fiscal, the government has raised Rs 5.84 trillion in bonds from the market.

“The devolvement at the auction on Friday, is a sign of investor 'fatigue', and the markets' appetite for further supply will be limited, in the absence of some support from RBI,” said Badrish Kulhalli, head of fixed income at HDFC LIfe Insurance.

The RBI kept policy rates unchanged, and economists say the room for aggressive rate cuts is limited. Inflation is on the rise, albeit should start coming down in the second half as per RBI estimates. But the bond market is more or less certain that rate support would no longer be there.

“With US yield up and higher than expected CPI market have given hope on October cut, market will now look for support from RBI in form of OMO,” said Jayesh Mehta, head of treasury of Bank of America. 
The RBI can also do operation twist, in which it simultaneously sells short bonds and treasury bills for longer maturity government securities.

"Expectations of OMO or Operation Twist is likely to build up in the coming days,” said Kulhalli.

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