Bonds end flat ahead of RBI policy, weekly auction

The RBI is widely expected to keep the interest rate unchanged and maintain its accommodative stance.

Yields on government securities ended flat to marginally up on Thursday, as most traders refrained from placing large bets ahead of the Reserve Bank of India (RBI)’s monetary policy and weekly bond auction on Friday. Yields on the new benchmark 10-year 6.10%-2031 ended at 6.2067%, compared to Wednesday’s close of 6.1988%. Yields on 5.63%-2026 and 6.64%-2035 bonds ended at 5.7115% and 6.8056%, respectively.

“The market has ended almost flat on lack of major triggers, but on the policy day, yields are expected to rise as traders believe that the RBI will revise its CPI forecast and may announce steps to reduce excess liquidity in the system,” a fund manager with a mid-sized fund house said.

The RBI is widely expected to keep the interest rate unchanged and maintain its accommodative stance. It is likely to revise inflation projection after the same breached the central bank’s upper band limit. The Monetary Policy Committee is scheduled to announce its bi-monthly policy review on Friday.

Inflation had unexpectedly risen to 6.30% in May and 6.26% in June. During the last policy meet, the central bank projected the consumer price index (CPI) at 5.1% for financial year 2021-22. For July-September, it was projected to be at 5.4%. The central bank is also expected to announce another tranche of the government securities acquisition programme (G-SAP).

Market participants expect yields to rise after the policy announcement, even though the central bank may intervene to keep yields in check. “The RBI can directly intervene in the market or may announce open market operations to stop yields from rising further,” a dealer with a private bank said.

The yields on the new 10-year bond are also expected to rise due to supply concerns, as this bond is present in the weekly auction. The RBI will sell 6.10%-2031 bonds worth Rs 14,000 crore, of the total Rs 26,000 crore. It will also sell 4.26%-2023 and 6.76%-2061 bonds worth Rs 3,000 crore and Rs 9,000 crore, respectively.

Traders expect that the 10-year will devolve in Friday’s auction as traders are expected to demand higher yields on the bond. In the previous auction, the central bank had devolved Rs 11,144.145 crore worth of 6.10%-2031 bonds on primary dealers and accepted only Rs 2,855.855 crore.

Meanwhile, prices of Brent crude were trading lower in the international market on increased supply by the OPEC that led to over-supply worries. Brent was trading at $70.74 a barrel, up 36 cents or 0.51%, for contract maturing in October 2021.

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