RBI to buy government bonds through market auction

MUMBAI: The Reserve Bank of India will purchase government bonds through a market auction programme, a move that may trigger a rally in the sovereign securities market on Friday besides easing cash crunch in the system.

The central bank will conduct the auction under a mechanism - called as open market operation in market parlance - on Monday for Rs 10,000 crore worth of bonds, RBI said in a release on Thursday.

“Definitely, the move has a collateral impact on bond yields due the long maturity papers included in the auction,” said Ashish Parthasarathy, treasurer of HDFC Bank. “Those liquid bonds would deepen the yield curve.”

“The benchmark bond yield may fall as much as 10 basis points on Friday,” he said.

RBI has included a total of five bonds maturing next four to 14 years. The central bank’s purchase programme is expected create demand in the market, which in turn, would lower the yields pushing prices up.

Earlier on Tuesday, RBI announced a bond buy-back programme by the government, not OMO, for Rs 20,000 crore. But, securities included were of short-term maturities, falling due for repayments next few months. In market parlance, the difference between the government buyback and OMO is that bonds cease to exist when the government buys back, while RBI takes securities in its book under OMO purchase.