Bond traders and investors expect the Reserve Bank of India to announce purchase of securities under its open market operation (OMO) next week to provide some respite to the yields amid weak appetite.
"Liquidity is drying up and one segment of participants is speculating that RBI may announce OMO purchase in three tranches," said a bond trader with a foreign bank.
The pace and timing of OMO purchases will be reliant upon how the weekly auction pans out given the weak investor appetite, the trader said.
The total surplus liquidity in the banking system stood at around Rs 70,000 crore while the intraday liquidity fell to around Rs 37,000 crore on Wednesday. Bond prices after opening lower on Wednesday extended fall during the day weighed by up tick in US Treasury yields amid lack of buying appetite.
However, by late evening trades, talk that RBI may announce an OMO purchase helped prices to rebound amid reports of lower borrowing via state development loans going ahead.
The central bank, owing to weak appetite in the market, and as a move to improve the marked to market (MTM) valuation cancelled the sale of two dated securities worth Rs 11,000 crore in the weekly auction last week.
However, some treasury officials believe that talk of OMO purchase announcement could be merely a rumour given the fact that liquidity is still comfortable in the system, and the central bank doesn't target any particular level of yields.
The 6.79 per cent 2027 gilt ended at Rs 96.43 (7.3216 per cent) after rising to Rs 96.45 (7.3186 per cent) compared to Rs 96.02 (7.3844 per cent) at close of previous session.
Reserve Bank of India deputy governor Viral Acharya in the December policy meet mentioned that the central bank may consider open market operations(OMO) in case the liquidity is required to be injected or absorbed on a durable basis.
The open market operation is a tool used for managing liquidity on a durable basis; hence the central bank observes the liquidity situation for a sustainable period of time before announcing the same.
RBI resorted to OMO sales operation in July this year after gauging the sharp surge in liquidity out of demonetisation announced in November 2016, and sucked out funds worth Rs 90,000 crore via OMO sales.