The Reserve Bank of India’s announcement that it will conduct special open market operations (OMO) aggregating ₹20,000 crore in two tranches seems to have only had a temporary cooling effect on Government Security (G-Sec) yields.

The yield 10-year benchmark G-Sec, carrying 5.79 per cent coupon rate, which thawed about four basis points intraday (with the price nudging up about 30 paise) on Tuesday when the OMO announcement was made, was up on Wednesday.

G-Sec/ bond yield and price are inversely co-related. Bond market expert K Boovendran said the increase in yields despite OMO announcement could have repercussions for one of the securities – 5.79 per cent G-Sec 2030 – which the RBI intends to purchase as part of Operation Twist (simultaneous purchase and sale of G-Secs) on Thursday.

Though the simultaneous purchase of four G-Secs and sale of four Treasury Bills aggregating ₹10,000 crore each by the RBI under the special OMO will sail through as there is no security-wise notified amount, Boovendran opined that market participants are unlikely to tender the 5.79 per cent G-Sec 2030 as they are sitting on losses.

Between May 8 – when the benchmark 5.79 per cent G-Sec 2030 was first issued – and August 26, the price of this security has seen a sharp ₹3.10 decline, with the yield jumping by about 43 basis points.

Under these circumstances, Boovendran emphasised that banks will prefer to wait for better times, when yields soften, to book profit.

Ripple effect on inflation

Bond market players say surplus liquidity on account of the earlier cash reserve ratio cut and long-term repo operations are having a ripple effect on inflation, which, in turn is leading to the spike in bond yields.

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