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In the early hours of trading on Tuesday, yields on India’s 10-year benchmark sovereign bond initially softened by four basis points to 6.64%, responding positively to the Reserve Bank of India's (RBI) liquidity easing measures announced the previous day. However, as the day progressed and banks began booking profits, yields hardened, ending the day at 6.69%. This market behavior exemplifies a classic "buy on rumor, sell on news" scenario, according to a private bank bond trader. Banks may have pressured yields by selling off bonds after Monday's three-year low dip.

RBI's Strategic Actions Impact Financial Markets

On a crisp autumn morning, the financial markets in India witnessed significant activity following the Reserve Bank of India's strategic decision to inject funds into the system. The central bank's actions were aimed at ensuring that overnight rates did not diverge significantly from the policy repo rate, which stands at 6.50%. The weighted average call rate was recorded at 6.55% on Tuesday, slightly down from 6.57% on Monday.

The RBI's comprehensive measures included purchasing government bonds worth Rs 60,000 crore, conducting a 56-day variable repo rate auction for Rs 50,000 crore, and organizing a $5-billion USD/rupee buy/sell swap auction for a six-month tenure. These steps were designed to alleviate interbank liquidity stress, regardless of foreign exchange fluctuations.

Market participants noted that while these measures were anticipated, their announcement led to immediate selling pressure. Gopal Tripathi, head of treasury at Jana Small Finance Bank, observed that once the RBI's plans were made public, the market saw increased selling and profit-taking activities. Rajeev Radhakrishnan, chief investment officer of fixed income at SBI Mutual Fund, added that most banks likely acted as sellers throughout the day, pushing yields higher.

Looking ahead, market analysts expect the 10-year yield to fluctuate between 6.60% and 6.70% for the remainder of the fiscal year. If expectations of interest rate cuts gain momentum, yields could potentially drop towards 6.50% levels.

From a journalist's perspective, this event underscores the delicate balance central banks must maintain between supporting liquidity and managing market expectations. The RBI's proactive approach highlights its commitment to ensuring financial stability, even as global economic conditions remain uncertain. For investors, it serves as a reminder of the importance of staying informed about central bank policies and their potential impacts on market dynamics.