Government bond yields in Mumbai have jumped to their highest level in nearly 11 months, driven by concerns over a supply glut from state borrowing and persistently tight liquidity conditions. This development has forced the Reserve Bank of India (RBI) to fast-track bond repurchases and roll out additional liquidity measures to stabilize the market.
Sharp Rise in Benchmark Yields
The benchmark 10-year 6.48% 2035 yield closed at 6.72%, marking a significant increase from 6.66%. This level represents the highest yield since early March, reflecting intense sell-off pressure in the bond market. The surge has been attributed to fears of oversupply as states ramp up their borrowing activities.
RBI's Accelerated Intervention
In response to the mounting pressure, the RBI has advanced its open market operations. Two bond-purchase auctions, totaling Rs 1 trillion, will now be conducted on January 29 and February 5. Each auction involves Rs 50,000 crore, moved forward from the originally scheduled dates of February 5 and February 12.
Additionally, the central bank has announced a 90-day variable rate repo of Rs 25,000 crore, set for January 30, which will reverse on April 30. To further inject durable rupee liquidity, a $10 billion dollar-rupee buy/sell swap is slated for February 4, with a three-year tenor. This measure is expected to provide approximately Rs 90,000 crore in liquidity.
Market Strain and Borrowing Plans
The bond market remains under considerable strain. States have recently sold Rs 39,800 crore worth of bonds and plan a record borrowing of Rs 5 lakh crore between January and March. Looking ahead, an expected gross borrowing plan of Rs 16 lakh crore to Rs 17.50 lakh crore for the next fiscal year has kept supply fears elevated.
Despite these interventions, liquidity conditions continue to be tight, and the transmission of interest rates has stalled. This combination of factors has created a challenging environment for investors and policymakers alike, with the RBI's measures aimed at mitigating the impact and restoring stability to the financial system.
