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The Government Securities (G-Sec) market did not seem impressed with the Reserve Bank of India’s move to purchase the 10-year benchmark G-Sec at a higher price in the special open market operation (OMO) as this security ended almost 28 paise down over the previous close.
The RBI purchased the 10-year G-Sec at about 22 paise higher than the previous close at the special OMO.
However, its price ended lower as the expectation of market players that the central bank would offer a still higher price in the wake of devolvement in the last five weekly auctions was not realised.
Operation Twist
The central bank on Wednesday conducted a special OMO (also known as “Operation Twist”) entailing purchase of four G-Secs maturing between 2025 and 2033 aggregating ₹20,000 crore and sale of three G-Secs maturing between 2021 and 2022 aggregating ₹15,000 crore.
The 10-year G-Sec (5.85 per cent 2030) on Wednesday closed at ₹97.13, down about 28 paise over the previous close, with its yield rising about 4 basis points to 6.2469 per cent.
Bond price and yield are inversely related and move in opposite directions.
Tighter conditions
Crisil, in a recent report, warned that fiscal 2022 could see tighter conditions, with high government borrowing leading to firmer government bond yields and moderation of excess liquidity by the RBI.
Crisil observed that supply of G-Secs will not pull back to pre-pandemic levels next fiscal because the Centre’s gross market borrowing is budgeted at ₹12.1- lakh crore in fiscal 2022, only marginally lower than ₹12.8 lakh crore in fiscal 2021, and sharply up from ₹7.1 lakh crore in fiscal 2020.
Crisil underscored that excess liquidity needs to be reduced. Else, a rapid surge in asset prices could lead to financial instability.
“And elevated CPI inflation could play spoilsport. Credit will find other takers. Improving growth prospects could spur credit growth by banks and reduce attractiveness of safe-haven G-Secs,” it added.
Meanwhile, the RBI said it will conduct simultaneous purchase and sale of G-Secsunder OMO for an aggregate amount of ₹10,000 crore each on March 18.
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