Bond market participants expect an open market operation (OMO) auction in the first week of November as the banking system liquidity is expected to ease on the back of government spending and maturity of bonds.
According to market participants, the Reserve Bank of India (RBI) will issue a notification on OMO sales by October 31.
They speculate that the central bank might conduct the auctions in multiple tranches of Rs 10,000 crore.
The amount is expected to be between Rs 50,000 crore and Rs 70,000 crore.
The tenure of the bonds in the auction is expected to be five to seven years.
“The OMO auction is expected in the first week of November as around Rs 1 -1.5 trillion of liquidity is expected to come into the system around that time,” a dealer at a state-owned bank said.
“The market is now comfortable with the deficit liquidity of Rs 10,000-12,000 crore,” he said.
Government bonds of around Rs 1.4 trillion are scheduled to mature in November, of which Rs 53,925 crore worth of bonds is expected to mature in the first week of November.
In his monetary policy statement, Reserve Bank of India Governor Shaktikanta Das had said the central bank might conduct OMO auction to mop up liquidity.
The central bank had not given any timeline for OMO sales and said it would depend on the ongoing liquidity situation.
The liquidity has largely remained in deficit since September 15.
The deficit liquidity neared Rs 1.47 trillion on September 19, the highest since January 29, 2020, when it went up to Rs 3 trillion.
Due to tight liquidity and uncertainty in the market, traders have been turning towards more liquid papers.
Trade volume has remained concentrated in the longer tenure papers since the liquidity in the banking system fell into deficit mode.
Amidst tight liquidity and market uncertainty, traders are increasingly favouring highly liquid papers.
The trade volume has primarily focused on longer tenure papers since the liquidity within the banking system fell into deficit mode.
On Thursday, the central bank injected Rs 94,365 crore in the system.
“In corporate bond market, volume is concentrated in the short term because that is more liquid and more into the AAA segment.
"In government bond securities, it is concentrated in long-term, especially long-term 10-year benchmark bond,” a dealer at a private bank said.
Meanwhile, the RBI has scheduled meetings with treasury heads next Thursday and Friday to gather feedback on the market developments.
“It is a general discussion.
"The RBI generally calls treasury officials for discussions,” a dealer at a state-owned bank said.
“There will be discussion about OMO, but it won’t limit to that,” he said.
