India's 10-Year Yield Spikes The Most In Over A Year On RBI Plan To Curb Liquidity

The yield on India's 10-year benchmark government bond spiked 12 basis points on Friday after the Reserve Bank of India announced the possible sale of government securities through open market operations to manage systemic liquidity.

"...while remaining nimble, we may have to consider OMO-sales (Open Market Operation sales) to manage liquidity, consistent with the stance of monetary policy," RBI Governor Shaktikanta Das said in his monetary policy statement on Friday.

"The timing and quantum of such operations will depend on the evolving liquidity conditions," he said.

The yield on the 10-year benchmark 7.18% 2033 bond was trading at 7.34% as of 3:30 p.m., as against 7.21% at close on Thursday. That's the biggest single-day jump since August 2022.

OMO operations refer to the purchase or sale of government securities in the open market by the central bank.

At the post-policy media conference, Das reiterated that OMO sales are an option to manage liquidity conditions, as an increase in currency-in-circulation during the upcoming festive season along with a pick-up in government spending would ease liquidity in the financial system.

A mild liquidity surplus may still require the RBI to keep their toolkit active in the coming months, Das said. The RBI can choose to suck out liquidity from the system through tactical use of OMO sales, forext swaps, variable-rate reverse repo auctions, and incremental cash reserve ratio.

"OMOs will be done through an auction process, not through NDS-OM," Das said in the post-policy media conference. On being asked if the rise in domestic bond yields has mirrored the spike in U.S. Treasury yields, Das clarified that it is only a reaction to domestic factors.

"Our liquidity management has nothing to do with (the rise in) global bond yields in advanced economies ... Domestic bond yields are reacting to domestic factors, not international factors," he added.

An increase in safe-haven US Treasury yields usually results in a flight of foreign funds towards attractive returns, weighing on emerging market currencies.

The RBI has "sizeable forex reserves" to cushion any sharp depreciation in the Indian rupee against the US dollar, Das said. The foreign currency reserves stood at $590.7 billion as of Sept. 22, an accretion of $12.2 billion in the ongoing financial year, according to the latest RBI data.

Going ahead, the Indian government bond yields are likely to recourse from their elevated levels, according to Dhawal Dalal, senior EVP and chief investment officer of fixed income at Edelweiss Asset Management. "The reaction to the OMO sales announcement is a little bit of an overreaction because RBI has clearly mentioned that it is a liquidity management tool, not an interest rate management tool," Dalal told BQ Prime.

Having risen to as high as 7.37% on Friday, the 10-year benchmark bond yield is expected to face tough resistance around 7.50–7.50%, according to Mahendra Jajoo, chief investment officer of fixed income at Mirae Asset Investment Managers. Movements in global crude oil prices and spikes in US Treasury yields will guide the yield on Indian government bonds, he said.

"While JP Morgan bond index inclusion is very positive, the immediate reaction will be guided by overshadowing events," Jajoo said. "... the impact crude oil prices will have on India's current account deficit and capital flows—these factors will overtake. We will have to distinguish between long-term positives on the margin and immediate factors," he said.