Late in August, the Reserve Bank of India
had announced steps to cool yields, including allowing banks to hold more debt without having to mark losses, fresh rounds of Federal Reserve-styled Operation Twists and liquidity injections. However, in a change of tone, at Thursday’s Operation Twist, the central bank accepted only 71.3 billion rupees ($970 million) of bonds out of a possible 100 billion rupees, and on Friday, it again surprised markets
by buying bonds at higher-than-expected yields.
The RBI also said it would inject one trillion rupees via 56-day repo operations while offering to take back longer duration one- and three-year cash.
“The RBI seems to be giving some conflicting signals which are creating skittishness in the market,” said Pankaj Pathak, a fixed income fund manager at Quantum Asset Management Ltd. in Mumbai. “There is nervousness on possible extra borrowing ahead of the second half borrowing calendar,” which is due by end-September.