Government bonds rally on RBI’s liquidity push

Government bonds rallied after the central bank announced aggressive liquidity infusion measures, including ₹2 lakh crore of bond purchases and a $10 billion dollar-rupee swap.The benchmark yield on 10-year bond closed at 6.54%, down over 9 basis points — its biggest singlesession drop in yields in seven months —responding to the Reserve Bank of India’s proposed liquidity injection. The 10-year yield, which had climbed to 6.70% on Tuesday to multi-month highs on heavy state debt supply and seasonal tax outflows, is expected to soften as RBI purchases absorb supply.Bond yields and prices move in opposite directions.126169292Liquidity conditions tightened over the past two weeks due to RBI’s likely intervention in the forex market to strengthen the rupee to 89 against the dollar from 91, compounded by advance tax outflows since mid-December. The money market has remained in deficit since mid-December.RBI plans to inject ₹2 lakh crore through open market operations (OMOs) in four phases beginning December 29, while the three-year forex swap will be held on January 13. Traders said the dollar swap is expected to inject rupee liquidity and lower forex forward premia, which had surged amid tight cash conditions and persistent RBI intervention.In December alone, RBI conducted ₹1 lakh crore of OMOs and infused ₹45,000 crore through forex swaps.“OMO auctions will contain longertenor yields and reduce steepening pressure on the curve,” Nomura said in a report released Wednesday.According to Venkatakrishnan Srinivas, founder of Rockfort Fincap, the 10-year yield is likely to be in the range of 6.40–6.50% by end-February, assuming RBI maintains surplus liquidity at 1% of net demand and time liabilities.The sharp rise in yields forced Power Finance Corp to scrap a ₹6,000 crore bond sale on Tuesday after bids came in at higher-than-expected coupons. On Wednesday, Nabard announced plans to raise ₹7,000 crore with amaturity of 3 years and 2 months.While the RBI measures provide immediate relief, traders remain cautious given looming state development loan supply and fiscal uncertainty ahead of the budget. “The ₹2 lakh crore of buying is notable and will likely cap yields for now, but concerns around supply and fiscal outlook persist,” Nomura said.