Traders at the trading floor of Motilal Oswal Financial services Ltd. (Photographer: Vivek Prakash/Bloomberg)

Bond Yields End Marginally Higher As RBI Gets More Liquidity Management Tools

Indian bond yields rose for the second consecutive session, ending marginally higher after the Reserve Bank of India (RBI) got more flexibility to manage the surge in liquidity following demonetisation.

The benchmark 10-year bond yield closed at 6.24 percent on Friday compared to its previous close of 6.21 percent.

Intraday, yields spiked to a high of 6.27 percent after the RBI said that the ceiling for bonds issued under the market stabilization scheme (MSS) has been raised to Rs 6 lakh crore compared to Rs 30,000 crore earlier. For the day, the central bank announced an auction of 28-day cash management bills for an amount of Rs 20,000 crore on Friday.

The RBI is now expected to mop up any additional liquidity through the issue of MSS bonds and through reverse repo auctions. This should prevent a surge of inflows into the bond market, which had pushed yields down to levels well below the repo rate of 6.25 percent.

Bond Yields End Marginally Higher As RBI Gets More Liquidity Management Tools

All Eyes On The RBI

The week started with a spike in yields on Monday after the central bank, on Saturday, announced that banks will be required to set aside 100 percent cash reserve ratio on deposits received between September 16 and November 11. The decision sucked out almost Rs 3.5 lakh crore from the system.

Following the announcement, the 10-year benchmark yield, which had fallen to a low of 6.18 percent the previous week, moved back up to levels closer to the repo rate of 6.25 percent. At the close of the week, the benchmark yield closed marginally below that.

At current levels, the bond market is factoring in a 25-50 basis point cut in the repo rate next week when the RBI announces its monetary policy review on Wednesday.