Mumbai, Aug. 26: Short-term interest rates are expected to remain firm this week with the Reserve Bank of India set to suck out Rs 54,000 crore from the system through the sale of government securities, cash management bills (CMBs) and treasury bills.
The cash-draining programme has had an impact on the yield of the benchmark 10-year bond, which firmed up 7 basis points today to close at 8.34 per cent.
Last week, bonds posted their biggest weekly gain in four-and-a-half years, largely driven by the RBI steps to support the rupee and liquidity in the market. The yields on bonds, which are inversely related to prices, had then dropped 62 basis points.
Bond market circles said a fresh fall in the value of the rupee was another major reason behind the rise in yields today.
On August 23, the RBI had conducted an open market operation of government securities of Rs 8,000 crore as part of its plan to prevent the hardening of long-term yields which had recently hit a five-year high.
Interest rates at the shorter end have remained firm because of the liquidity tightening steps taken by the RBI. For instance, the inter-bank call money rate (at which banks borrow from each other) continues to remain above 10.25 per cent.
Even as the bond yields have started firming again, the RBI today announced that it would float government securities worth Rs 17,000 crore on August 30. The announcement came on a day the central bank fixed an yield of 11.8936 per cent at an auction of CMBs for Rs 11,000 crore. CMBs, such as treasury bills, are short-term maturities of less than 91 days.
The RBI will conduct another auction of CMBs for Rs 11,000 crore on Tuesday.