Triggering alarm: Reserve Bank of India's lack of support pushes up yields

 The 10-year bond yields continued to rise for the fourth straight session to close at 6.202 per cent from its previous close of 6.135 per cent

The bond market is not in a mood to reason with the Reserve Bank of India (RBI) on keeping yields low. The 10-year bond yields continued to rise for the fourth straight session to close at 6.202 per cent from its previous close of 6.135 per cent.
The yield was at 6 per cent a week ago.

The RBI wants the yields to remain at 6 per cent, but bond dealers say the central bank will have to step up its bond-buying programme.

A section of the market also says the RBI should not hurry in normalising its liquidity operations because that is scaring bond market participants, even as excess liquidity in the system is nearly Rs 6 trillion.

The RBI has been devolving auctions, or forcing underwriters of bonds to buy the bonds or even cancelling auctions to check yields. However, those actions are not having the desired effect.

The bond market demands more open market operations (OMO) from the RBI, but with so much liquidity around, the space for a huge OMO is also getting constrained. At the same time, a section of the bond market is suggesting that the RBI should stop the variable reverse repo auctions, through which it absorbed Rs 2 trillion of liquidity at just 3.55 per cent. The money, they argue, could have been better used in buying bonds when it is largely left to domestic investors to participate in the bond auctions.