Nomura says 10-year gilt yield may ease to 6.50% after RBI's liquidity boost
This story was originally published at 17:50 IST on 6 March 2025
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MUMBAI – The Reserve Bank of India's proactivity to add liquidity through more open market purchase of gilts and currency swap auctions could help yield on the 10-year benchmark government bond ease to 6.50% over the coming week, Nomura said in a note on Thursday. The yield on the 10-year gilt closed at 6.68%, the lowest level in a month, from 6.71% Wednesday.
The RBI will buy government bonds worth INR 1.00 trillion through open market operation auctions in two tranches -- INR 500 billion each on Mar. 12 and Mar. 18 -- to infuse liquidity into the banking system, the central bank said in a release late Wednesday. It will also conduct a dollar/rupee buy/sell swap auction of $10 billion for a tenor of three years on Mar. 24.
With these additional measures, liquidity in the banking system may move to a small surplus, analysts said. However, the RBI's net short dollar position of $77.5 billion as of Jan. 31, with redemption of up to three months, may pose significant drain to liquidity if rolled over, the Nomura note said.
The market should also start pricing in the overnight Mumbai Interbank Offer Rate--the floating leg of the overnight indexed swap contracts--to trade with a 5 basis points premium over the repo rate before nearing or falling below it after the RBI's dividend to the government in May, it said. The overnight MIBOR Wednesday was set at 6.29%, the lowest since February 2023. Nomura expects the two-year overnight indexed swap rate to ease to 5.60%, and has maintained its 'long' position on Indian government bonds supported by the RBI's OMO buys.
Market participants and analysts expected durable liquidity measures by the RBI due to tight liquidity conditions in the banking system. Liquidity injected by the RBI--a proxy for systemic liquidity deficit--fell to INR 3 trillion in late January due to the central bank's heavy dollar sales and drain from advance tax payments made in December. So far, the central bank has already bought gilts worth nearly INR 1.4 trillion through open market operations, both through auction and on-screen buys. The RBI has also undertaken both daily and longer-tenure variable rate repo tenders, as well as dollar/rupee buy/sell swaps to inject durable liquidity in to the banking system.
However, the liquidity proposed to be injected with recent measures announced Wednesday is nearly INR 1.87 trillion, higher than what analysts had expected. The measures show that the central bank's intent to move core liquidity to surplus rather than remaining in deficit, analysts said. "Core liquidity situation is expected to look comfortably positive from mid/late May," a note by Bandhan Asset Management Co. said.
The OMO buy auctions will help to push government bond yields lower, which were earlier under pressure due to higher supply of state bonds, the Nomura note said. "The India government bond OMO auction will allow banks to make space in their held-to-maturity books for the higher yielding state bonds, easing supply pressures," it said. Investors in long-term bonds will also have a very good entry point due to the additional liquidity infusion after the recent fall in bond valuations, and as RBI cuts rates further, Bandhan AMC said. A possible turn to the US exceptionalism trade which could bring back commercial demand for emerging market bonds and a conservative government fiscal stance may also push down long-term bonds yields, it said.
Meanwhile, the RBI's dollar/rupee buy/sell swap auction will add liquidity towards the end of the month and reduce pay pressure on the non-deliverable cross-currency swaps undertaken to hedge flows from external commercial borrowings, Nomura said.
Increased bets on rate cuts as the central bank takes control over liquidity, will also boost market rates. "They signal a decisive break from a presumed earlier approach," the Bandhan AMC note said. "With RBI's new reaction function clearer, one also has greater confidence that should liquidity conditions not evolve as currently envisaged, further steps will be proactively forthcoming to ensure that rate cut(s) have an enabling underlying environment for transmission." The weighted average triparty repo rate eased below 6.00% for the third straight day Thursday, leading to lower funding costs. End
US$1 = INR 87.11
Reported by Srijita Bose
Edited by Ashish Shirke
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