Government Bond Yields and RBI's Open Market Operations

The Reserve Bank of India (RBI) has taken a proactive stance ahead of the April monetary policy review by announcing ₹80,000 crore in Open Market Operation (OMO) purchase auctions. This move is aimed at easing financial conditions.

Impact on Bond Yields

• The yield on the 10-year benchmark government bond fell by 10 basis points to 6.48%, the lowest in three years.
• In March, the benchmark yield had already decreased by 15 basis points.
• Yields on 15-year and 5-year bonds also decreased by 9 basis points.

State-Owned Banks and Portfolio Adjustments

State-owned banks are replenishing their held-to-maturity (HTM) portfolios, contributing to the decline in yields. Banks must classify bonds as HTM permanently, except for 5% of the portfolio, which can be withdrawn during the year with necessary approvals.

Liquidity and Auction Details

• The banking system's net liquidity has flipped to surplus mode, standing at ₹1.42 trillion.
• The RBI plans to purchase ₹80,000 crore worth of government securities in four tranches of ₹20,000 crore each, scheduled for April 3, April 8, April 22, and April 29.

Market Reactions and Observations

• The market did not anticipate such aggressive OMO from the RBI, indicating their intent to inject long-term liquidity.
• The absence of selling by public sector banks is a key driver of the bond rally, as many banks had offloaded major positions in previous OMO auctions.
• The period from April to June is a relatively slow credit season, allowing banks to channel surplus funds into investments.

Yields on Other Financial Instruments

• Ample liquidity led to a decrease in cut-off yields on Treasury bills by about 20 basis points in the weekly auction.
• Yields on top-tier banks' certificates of deposit have also softened, falling between 50 and 65 basis points across tenures.