Mumbai
The Reserve Bank of India's unexpected $1.50 billion debt-purchase announcement sent bonds rallying on Thursday, with the 10-year bond yield plunging as much as 6 bps to 7.68 per cent.
The move by the central bank is expected to relieve tight cash conditions in the banking system and also signals an effort to push down yields, which rose to a 3-month high to 7.79 per cent, on Monday.
The RBI late on Wednesday said it would buy bonds worth up to Rs 100 billion ($1.50 billion) via open market operations (OMO).
The announcement came as the liquidity shortage in the banking system was 1 trillion rupees at the end of November, sharply up from about Rs 680 billion a month earlier.
Traders said they expected at least one more OMO purchase this month as a deadline for advance tax payments from companies is likely to squeeze cash conditions further. One analyst predicts the liquidity shortage could hit Rs 1.4 trillion.
OMOs could also help push down bond yields further ahead of a widely expected U.S. rate hike later this month.
Foreign investors last month cut their holdings of Indian government bonds by $645.53 million, the biggest amount of net selling since May. That caused a 15 basis point rise in the 10-year bond yield during November, even though the RBI cut interest rates by a larger-than-expected 50 bps on Sept. 29.
The rise in yields had raised worries that higher borrowing costs were undermining the RBI's 125 bps of repo rate cuts this year.
"Along with a liquidity view, RBI has also given a directional view on yields by announcing this OMO," said Vijay Sharma, senior executive vice-president at primary dealer PNB Gilts Ltd in New Delhi.
"However, to put confidence back into the investors as well as to see that this action produces the desired results, RBI may have to conduct one to two more OMO in December."
The rate cuts have let the RBI focus on supporting economic growth. But it held rates at its policy review on Tuesday.
Bond yields and cash conditions could determine the extent of OMOs this month, traders added. India is due to hold only two more debt auctions this year, one this week and one next week.
