Investors must have a bullish bias in bonds. Liquidity and open market operation (OMO) purchases will continue to exert downward pressure on yields in coming months.
Recall that the Reserve Bank of India (RBI) changed its stance on liquidity on 5 April when it announced that it will move banking system liquidity from a deficit to neutral and, since then, it has been infusing liquidity through OMOs.
It announced its latest round of bond buybacks (of Rs.100 billion) this week after market hours. This takes the OMO purchase tally to Rs.1.005 trillion for the fiscal year (year starting April 2016). The forecast is of Rs.2 trillion in bond buybacks for the full fiscal year.
The most interesting aspect of recent buybacks is the RBI’s willingness to infuse liquidity into the banking system, even when total system liquidity is in surplus. We estimate total system liquidity (banking system liquidity + government balances) at an Rs.850-900 billion surplus as of end-August.
