RBI opts for longer-term bond buys to add liquidity at OMO purchase auction

Jan 30, 2025

Reserve Bank of India bought bonds worth Rs 20,020 crore($2.31 billion) at an open market operation (OMO) on Thursday. The 10-year benchmark that matures in 2034 accounted for one-fourth

India's longer duration government bond yields declined on Thursday after the central bank favoured them at its first debt purchase auction in over three years.

The Reserve Bank of India bought bonds worth Rs 20,020 crore($2.31 billion) at an open market operation (OMO) on Thursday. The 10-year benchmark that matures in 2034 accounted for one-fourth of that purchase. Papers maturing in 2033, 2034 and 2037 made up the rest.

The central bank did not buy a bond maturing in 2029.

The benchmark bond yield fell two basis points to the day's low of 6.6704 per cent after the auction result, while yields on bonds of maturities between 2034 and 2039 also slipped. The benchmark yield ended at 6.6803 per cent

"Looking at today's result it is likely that the central bank may continue to include benchmark security in the next two OMO auctions as well," said VRC Reddy, treasury head at Karur Vysya Bank.

Market participants had not expected the RBI to purchase a large quantum of the benchmark, and some say it will not buy at yields sharply lower than market levels.

"Since that paper is very liquid, the RBI may not choose to buy it if the cutoffs get too aggressive. We think that the RBI will target securities across the board going forward to flatten the yield curve," Anshul Chandak, head of treasury at RBL Bank said.

The RBI is scheduled to buy bonds worth Rs 20,000 crore each on Feb 13 and Feb 20.

These purchases are part of the mega liquidity infusion package announced on Monday, through which the central bank will infuse around Rs 1.50 trillion into the banking system.

Economists also see this is a precursor to rate cuts.

[Reuters]