Bonds rally on reports stating RBI may absorb part of extra bond supply in FY21

The RBI also conducted OMO purchases worth Rs 15,000 crore on Thursday.

Bonds rallied on Thursday with the benchmark yield closing 8 basis points down to almost a two-week low of 6.22% led by reports in the market that the government has asked the Reserve Bank of India (RBI) to absorb part of the additional government bonds that will be issued in the fiscal year 2021 in the wake of the announcement of the stimulus package by the government. FE could not independently verify the authenticity of these reports.
An open market operation (OMO) conducted by the RBI on Thursday and anticipation of some monetary action announcement from the central bank also contributed to the rally.

A bond market participant told FE that there was a strong anticipation in the market that the central bank would announce a rate cut. “Moreover, certain reports indicated that the government has asked the central bank to absorb some of the additional supply of bonds hitting the market next fiscal. This led to a rally in the G-secs. Some traders also believed that the RBI is going to conduct a press conference in the evening and that led to some anticipation that a rate action could be in the offing,” the expert said.

Siddharth Shah, head of treasury at STCI Primary Dealer, confirmed with FE that bond market participants started believing any additional borrowing by the government in the backdrop of the fiscal package would be absorbed by the RBI through OMOs. “This optimism coupled with the OMOs conducted on Thursday helped push the yields down. Long positions that existed in the market a few weeks ago have been wound down and G-sec traders are sitting on low inventory right now,” Shah said.

The RBI also conducted OMO purchases worth Rs 15,000 crore on Thursday. As against the notified amount, the central bank received bids worth Rs 39,529 crore. Furthermore, the RBI also announced it would conduct a 13-day variable rate reverse repo auction on Friday worth Rs 3.5 lakh crore. Under a reverse repo auction, participants can park their excess funds with the RBI.

Experts say that with the market sitting on huge cash and refusing to deploy it in the current environment, the Treps rate has crashed in recent times. Treps is a collateralised borrowing system where mostly private banks, foreign banks and primary dealers borrow short-term money using G-secs or treasury bills. On Thursday, the overnight Treps rate fell to as low as 0.35 while the weighted average rate fell to 0.91.

“The fall in the Treps rate is an indication that people are sitting on cash but do not want to deploy it in any securities in view of the prevailing uncertain market conditions. With the Treps market seeing rates going down, the central bank may have felt it prudent to absorb some extra liquidity from the system and that is why we are seeing the variable reverse repo being announced on Thursday,” Shah said.