Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Impact of first open market operation
Tue, 14 Jul Pre-Open

The Reserve Bank of India will sell government bonds through open market operations on Monday. It is set to raise Rs 100bn in an aim to drain excess liquidity from the banking system.

Usually the yield rates on bond have a correlation with the policy rates as decided by the RBI. If the bank rate goes down, usually there is a similar effect in the bond yield rates. In India, the spread between the policy rate and the yield on 10-year paper is very low, but that could probably be undergoing a correction now.

On 15 January, the date of the first rate cut in this phase, the yield on the 10-year government bond dropped from 7.77% to 7.69%; on 4 March, the day of the second rate cut, it fell from 7.7% to 7.69%; and, on the day of the third rate cut on 2 June, it rose from 7.82% to 7.93%. The yield is around 7.8% now. The yield has remained high in-spite of the policy rate cuts which have taken place.

The main reason behind the same is because of the demand-supply balance turning adverse as FIIs are near their buying capacity limit. Overall foreign institutional investors' (FIIs) exposure to Indian debt market is $81 billion and close to 86% of this has been used. FIIs' exposure to government bonds is not even 5% compared with at least 40% in countries such as Indonesia and Malaysia.

RBI will have to take adequate steps to ensure that the FII limit is increased. Another reason being RBI has reduced policy rate by 75 basis points in three phases, from 8% to 7.25%. However State Bank of India (SBI), ICICI Bank, Axis Bank have cut loan rates by 30 basis point each during the same duration. The quantum of cut is less than half of the cuts in the policy rate. The reason for the slow transmission of policy rate cuts to the ultimate customer is as follows - the depositors continue to earn higher rates till their deposits mature but when loan rates are pared, old loans are re-priced according to the new rates. Banks are faster in cutting their deposit rates than their loan rates, as they are always keen to protect their net interest rate margin. The recent crisis in China and Greece has sprouted fears among the foreign investors to invest their money in safe haven such as U.S treasury bonds rather than in emerging markets.

All factors combined may lead to increase in the yield of government securities due to an adverse demand-supply balance.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

What else is happening in the markets today? Dig in...

Equitymaster requests your view! Post a comment on "Impact of first open market operation". Click here!


Views on News

ESG Investing Is Gaining Preference Among Investors. Should You Invest? (Outside View)

Oct 28, 2020

ESG being a niche segment in the Indian mutual funds industry consists of only a handful of funds at present.

Why the Kotak Bank - IndusInd Bank Merger Should Interest You (Profit Hunter)

Oct 28, 2020

106%, 71%, 114% are the kind of returns banks have generated immediately after a virtuous merger.

The Real Upside in Kotak - IndusInd Bank Merger podcast (Views On News)

Oct 28, 2020

Why the proposed Kotak IndusInd merger has merit and urgency.

Important Update for Traders on the Rupee and Interest Rates (Fast Profits Daily)

Oct 27, 2020

Recently the USDINR and Indian bond yields have started to make important moves. In this video, I'll tell you why traders should be watchful.

PSU Banks Will Move Up Again (Profit Hunter)

Oct 27, 2020

My charts tell me PSU banks are set for a rebound.

More Views on News

Most Popular

My View on ITC (Fast Profits Daily)

Oct 23, 2020

What do the charts say about ITC?

Why ITC and not HUL is my Idea of a Good Investment Right Now Views On News (Views On News)

Oct 15, 2020

Rahul Shah discusses HUL's lost decade and its implications for ITC.

PSU Banks Will Move Up Again (Profit Hunter)

Oct 27, 2020

My charts tell me PSU banks are set for a rebound.

Why India's Drone Revolution is a 4x Profit Opportunity (Profit Hunter)

Oct 16, 2020

My research on India's leading defence companies brought me to one major player in drone manufacturing.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Oct 28, 2020 03:36 PM