System Liquidity turned negative as the LAF numbers released by RBI show a deficit of inr 42K crore from a surplus of 2K crore yesterday. This deficit in liquidity is being attributed to short tenor S/B FX Swaps conducted by RBI.
Yields on the IN10s surged following the announcement of likely OMO sales in the RBI policy on Oct 6. Despite the sharp fall in US yields yesterday on dovish Fed speak and safe haven buying, Yields on the 10Y closed (at 7.35%) near the day's high of 7.37%. Reckon OMO announcement will only come once there is a decisive turn in system liquidity to surplus and a durable decline in weighted average call rate (WACR) in the overnight segment. The WACR yesterday was 6.72%.
Today the Gsec yields are trading lower at 7.3150%.
Keeping a close watch on evolving liquidity conditions while forecasting the liquidity requirement on a weekly basis will be important to judge the timing of the OMO sales.
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