RBI'S BOND SALE PLAN LEADS TO ROUT

The government bond market witnessed a selloff on Friday after the RBI governor said that the central bank could resort to open market operation (OMO) sales to manage liquidity in the banking system. Bond prices fell and benchmark 10-year gilt yields firmed up by 12 basis points (100bps = 1 percentage point) to close at 7.34% while the cut-off yield for the same bond at Friday's auction was 7.35%.

Under OMO, the central bank either buys or sells government securities (G-Secs) to pump in or pull out liquidity from the system, as the situation warrants. In case of OMO sales, RBI would sell G-Secs in the market and take in money. Fearing excess supply of G-Secs, on Friday the prices of these bonds fell and yields rose. This happened despite the governor clarifying that it could resort to OMO sales only to manage liquidity and not yield.

Learn More