The 10-year benchmark bond yield closed 6.52%, two basis points higher than its previous close, largely due to a demand supply mismatch.
“Today’s (Fridays’) data gives a confirmation to the market that the central bank was present last week. It also seems to have done OMO purchases at the start of this week worth around the same amount as last week,” said a bond trader with a primary dealership.
Market participants, however, believe that secondary market purchases of liquid papers by the central bank will not be able to soften bond yields since the long end of the curve requires support.
“They (RBI) have to give a signal that they are present at the longer end of the curve, too. With every long bond auction, yields are rising by 2-3 basis points, which is spilling over on the 10-year yield, too,” said another trader at a primary dealership.
In the G-sec auction Friday, the cut-off yield on the 40-year paper was 7.37%. The previous 40-year auction last month had a cut-off yield of 7.16%, RBI data showed. “We also have to see if these OMO purchases were made to replenish the RBI’s book, or to give a signal to the market. From a liquidity perspective, it was not expected because there is still another tranche of the CRR cut left in this month,” the trader said. Two of the four tranches of reduction in the cash reserve ratio (CRR) came into effect October 4 and November 1, helping the system liquidity turn into a surplus from deficit. The next tranche of CRR cut will take effect November 29, taking the reserve ratio to 3%.
The percentage point cut in CRR is expected to release a total of Rs 2.5 lakh crore into the banking system by December.
Banking system liquidity stood at a surplus of Rs 2.4 lakh crore as of November 13.
The RBI conducted a variable rate reverse repo (VRRR) auction to absorb excess liquidity, but saw soft demand, as market participants remain cautious about parking funds ahead of the weekend and during a time when credit demand is expected to be robust.
In the first such auction in over a month, participants offered Rs 57,380 crore, against a notified amount of Rs 1 lakh crore, data showed.
