New Delhi: Indian government bond prices climbed to their highest levels in over three years on April 15, with short-term bonds leading the gains after the Reserve Bank of India announced a new liquidity injection.
Market participants now anticipate continued durable liquidity injections throughout the year, following the central bank’s latest move and guidance on banking system liquidity.
The Reserve Bank of India plans to purchase bonds worth Rs 40,000 crore and will also conduct a 43-day repo operation for Rs 1.50 trillion on Thursday.
This follows the central bank’s second consecutive repo rate reduction last week, accompanied by a shift to an accommodative monetary policy stance.
RBI Governor Sanjay Malhotra stated last week that the central bank aims to maintain sufficient surplus in the banking system to ensure effective policy transmission, targeting a level of approximately 1 percent of deposits.
This translates to a range of Rs 2.20 trillion to Rs 2.50 trillion, while the daily average banking system liquidity surplus has remained around Rs 1.70 trillion for the current month.
With the central bank in the midst of its rate-easing cycle, market participants believe comfortable liquidity conditions are essential for quicker and more effective monetary policy transmission to support economic growth.
The yield on the 10-year benchmark bond declined by 3 basis points to 6.41 percent, while three-year and five-year bond yields fell more substantially by 5-6 basis points to 6.12 percent and 6.17 percent respectively.
A. Prasanna, Head of Research, ICICI Securities Primary Dealership, commented, “The indicative commitment may still require (net) durable liquidity injection of around Rs 3 trillion. Out of this, we expect around 90 percent to be via OMO purchases and balance via fx swaps.”
VRC Reddy, Treasury Head, Karur Vysya Bank, added, “RBI’s surprise announcement demonstrates its commitment to maintain ample liquidity. This move is likely to sustain the bullish momentum in yields, potentially driving 10-year yield below 6.40 percent, with shorter duration bond yields witnessing a further slump.”
