Mumbai: The yield on 10-year government bond today fell to a nearly two-month low after traders cheered Reserve Bank of India’s announcement of open market operations and continued drop in international crude oil prices. At 9.15 am, the yield on 10-year gilts stood at 7.851% - a level last seen on 21 August - from its previous close of 7.889%. Bond yields and prices move in opposite directions. Meanwhile, the rupee also moved higher and was trading at 73.18 a dollar, up 0.53% from its Tuesday’s close of 73.57. The currency opened at 73.16 a dollar.
Easing crude oil and softer consumer price inflation has reduced monetary policy tightening expectations. Fifth successive open market operations since end of September and expectations of further such purchase by RBI in order to address the widening liquidity deficit further supported sentiments.
Brent crude oil, which earlier this month surged above $86 a barrel for the first time in nearly four years, now sits at a two-month low at $76.74 a barrel. Since 28 August, crude prices are down over 10%.
On Tuesday, RBI announced that it will buy Rs 12,000 crore of bonds via open market operations with maturities of 2020 to 2031.
“In order to avert a systemic shock and adverse impact on growth, we expect the RBI to conduct OMO purchase, at least around Rs1.5-2.0 trillion in FY2019 with the remaining liquidity to be met by the regular money market operations. We expect OMO purchases’ frequency to increase to 2-3 per month in 2HFY19,” said Kotak Institutaional Equities in a 1 October note.
“Overall, while the OMO purchases are expected to provide some comfort to the bond market, elevated crude oil prices, weakening INR, tight domestic liquidity and expectations of tighter monetary policy are expected to cap the gains,” Kotak report added.
Kotak expects the benchmark 10-year yield to trade in a broad range of 7.75-8.25% in second half of fiscal year 2019.