Yields on the 10-year benchmark Government Securities (G-Sec) softened about 4 basis points on Monday after the Reserve Bank of India (RBI) announced that it will purchase four G-Secs aggregating ₹20,000 crore, a move aimed at keeping G-Sec yields in check.

However, the OMO effect is likely to be shortlived as the government suddenly announced in the evening that it will be raising up to ₹26,000 crore (notified amount: ₹22,000 crore plus additional subscription option: ₹4,000 crore) by selling two G-Secs (re-issue) via a special auction on Thursday.

This special auction comes ahead of the scheduled auction on Friday to raise ₹26,000 crore via four securities. In this auction, the government reserves the right to exercise a greenshoe option to retain additional subscription up to ₹2,000 crore each against one or more securities.

Special auction

So, while the RBI announced that it will conduct OMO purchases on Wednesday to ensure yields thaw ahead of the scheduled auction on Friday, the government’s sudden move to raise resources via a special auction on Thursday may have thrown a spanner in works of the central bank’s plan to give comfort to the market on yields.

Yields had risen to touch 6.1634 per cent in intraday trading in the G-Sec market last Tuesday on concerns over the fiscal deficit and the government’s borrowing programme. When G-Sec yields in the secondary market go up, the government has to pay higher coupon rate to raise fresh resources. The OMO purchase announcement to tamp down yields needs to be seen in this context.

Following the OMO purchase announcement, the yield on the benchmark 10-year G-Sec, carrying a coupon rate of 5.77 per cent, softened to close at 6.0870 per cent against 6.1283 per cent on Friday.

The price of this security went up 29 paise to close at ₹97.74. Bond yields and prices are inversely related and move in opposite directions.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “OMO of ₹20,000 crore was the reason G-Sec yields declined today. After two G-Secs devolved on primary dealers at last Friday’s auction, yields would have inched upwards.

“The huge borrowing number is putting pressure on bond yields. However, the OMO announcement has capped yields. Additional borrowing on Thursday and the scheduled borrowing on Friday will put pressure on yields.” Irani said the RBI will have to keep coming up with OMOs else the yields will start inching upwards.

Crisil has cautioned that the demand for G-Secs by banks could be affected. Referring to the economic recovery gaining momentum, the credit rating agency said this implies a pick-up in credit growth.

Banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields, said Dharmakirti Joshi, Chief Economist; Dipti Deshpande, Senior Economist; and Pankhuri Tandon, Economist, in the report.