The central bank announced that it will conduct Rs 50,000 crore worth of LTRO that would be equally split between the one-year and three-year tenors.

Bonds rallied on Friday as foreign portfolio investors (FPIs) went on a buying spree and also because of the optimism ahead of the first tranche of long-term repo operations (LTRO) that will be conducted on Monday. The benchmark yield closed 5 basis points down to hit over a 6-month low of 6.37%.

Indeed, FPIs have been on a buying spree having bought more than $2.3 billion since February 5. Except one session, FPIs were net buyers of Indian bonds since February 5.

MS Gopikrishnan, an independent market expert, pointed out that the central bank's upcoming LTRO is having its effect on the yields. "We are getting closer to the LTRO that would be conducted soon. The downward pressure on yields is in anticipation of the operation. Heavy FPI buying is also contributing to the rally," he said.

During the monetary policy, the Reserve Bank of India (RBI) had said it will conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of '1 lakh crore at the policy repo rate. This means banks would be able to borrow one-year and three-year tenor money at just the policy repo rate that currently stands at 5.15%.

The central bank announced that it will conduct Rs 50,000 crore worth of LTRO that would be equally split between the one-year and three-year tenors. The 3-year LTRO will be conducted on Monday while the one-year LTRO will be done on February 24. Going forward, it would be noteworthy to watch whether the RBI will do further LTRO in addition to the already-announced Rs 1 lakh crore.

Post the announcement, the yields have been on a downtrend even ignoring the high consumer price index (CPI) inflation print of 7.59% for January. Other factors like depressed oil prices and fall in US treasury yields are also acting in favour of Indian bond yields.

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