The RBI presented the bi-monthly report on 6th August. The RBI kept the repo rate unchanged at 4%. Following the same, the benchmark yield increased three basis points and closed at 6.234%. The benchmark yield also touched an intra-day of 6.262% and was opened with 6.252%. It has seen a 0.43% positive change. 6th August change was the highest positive change since mid-July.
Commenting on the reason behind the rise in bond yield, Mahendra Kumar Jajoo, Chief Investment Officer- Fixed Income, Mirae Asset Investment Managers (India) earlier in the last month told leading English daily, "Yields on the 10-year bond rose because the RBI partially devolved the benchmark bond and there was low demand in the market."
However, the bond yields moderated later yesterday as RBI rejected all bids at the weekly bond auction. The central bank sold bonds worth Rs. 3750 crore and Rs. 11250 crore through the sale of 4.26% - 2023 and 6.76% - 2061 bonds. Now investors are eyeing for better yields.
The announcement of the variable rate reverse repo (VRRR) auction and the 60 bps increase in CPI inflation projection actually drove the rise in benchmark yield. The RBI is planning to conduct VRRR auctions worth Rs. 4 lakh crore at the end of September. It will take up surplus liquidity from the economy. RBI Governor Shaktikanta Das also stated, "There has been a high appetite for VRRR, going by the bid-cover ratio." In the present situation, banking system liquidity is projected to have a surplus of about Rs. 8 lakh crore.
Hike or fall in yields depends on trends in interest rates. It results in capital gains or losses for investors. The rise in bond yields pulls the bond prices down in the market. Eventually, any fall in bond yield means the bond prices are going to be up in the secondary market. This will help to generate capital gains.
It is a known notion that the US Treasury yields and Indian bond yields are co-related. Any fall in the US Treasury yields brings bond yields down here. Similarly, a rise in the US Treasury yields will bring the bond yields higher in India. In the present situation, economic uncertainty is also impacting the bond yields in the country.
But in the recent tie in India RBI's interventions have been one of the most important drivers. RBI, earlier this year in April announced to buy bonds. The program is called the Government Securities Acquisition Programme (G-SAP) to buy government securities (G-sec) of Rs. 1 lakh crore in the first quarter of FY22. The union government additionally announced that the G-SAP 2.0 of Rs. 25,000 crore each will be operated on 12th August and 26th August. Hence, the yield might go down again.
When inflation goes higher in India, the government tries to defuse money from the economy. Thus increases the interest rates. Better interest rates eventually give better bond yields. Investors start to realize that the commodities like gold will not give good profits and they turn towards government bonds.