The RBI met treasury heads of several banks yesterday to discuss why bond yields have been surging so fast. In the past 2 weeks, the yield on the 10-year bond has risen by over 100 basis points. Despite 3 rate cuts, bond prices returned to end-November levels yesterday.
Bankers told RBI that the government bond supply is too large, and the RBI’s bond purchase is not sufficient.
They suggested that it must be of more liquid bonds. Some also advised the central bank to intervene aggressively in the market by announcing that it will purchase bonds through the day below a chosen level. This is called an on-tap purchase.
Some bond dealers fear that given the RBI’s concern, it may also cap the amount of money it is absorbing through the reverse repo. This, they say, will force banks to park that excess money in bonds which can bring down yields. The RBI typically acts on Fridays, so the market is on the watch for that.
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