Benchmark bond yields jumped to their highest in four weeks on Friday as the RBI mopped up Rs 2 lakh crore through a variable rate reverse repo auction even as its silence on an open market operation during trading hours also hurt sentiment.

The Reserve Bank of India (RBI) last week said it would conduct the reverse repo auction on January 15 after a review of the liquidity and financial conditions.

Markets read the release as an indication that the RBI was looking to roll back the massive cash surplus in the banking system, despite its reiteration that it would ensure availability of ample liquidity.

“The market is confused about what the RBI is trying to do. A lot of times it feels like the RBI doesn’t realise the fallout of its actions and then tries to balance it out,” Reuters quoted a senior debt trader at a private bank.

The benchmark 10-year bond yield ended at 5.95 per cent versus 5.93 per cent on Thursday, its first weekly rise in three and its biggest since the week ending September 11.

This came as the 14-day variable rate reverse repo auction saw the central bank setting a higher cut-off rate of 3.55 per cent compared with the reverse repo rate of 3.35 per cent, thus signaling to the markets that it wanted higher rates at the shorter end of the spectrum. A Bloomberg News Survey had forecast the cut-off at 3.5 per cent.

The yields also rose over uncertainty whether the central bank would announce an open market operation (OMO). which supports government security prices.

However, the central bank announced an OMO of Rs 10,000 crore after the market hours. Observers feel bond yields could soften as trading resumes on Monday following this announcement.

A key intention behind Friday's variable reverse repo auction was to push up the shorter term rates above the reverse repo rate, which is usually this lower bound of the policy corridor. After the RBI’s announcement last week, yields on shorter term bonds had risen over 20 basis points.

At the auction, as against the notified amount of Rs 2 lakh crore, the RBI received bids of Rs 3.05 lakh crore.

In a separate announcement after market hours, the RBI said in a statement that on a review of current liquidity and financial conditions, it

has decided to conduct purchase of government securities under OMO for an aggregate amount of Rs 10,000 crore on January 21.

Market circles say that the intention of the central bank here is to keep interest rates softer at the longer end of the spectrum to support the economy which is expected to contract 7.7 per cent this fiscal.

Stocks dip

The benchmark indices — the Sensex and the Nifty — ended in the red because of profit booking amid weak global cues despite a good beginning to the results season.

The 30-share BSE Sensex slumped 549.49 points or 1.11 per cent to finish at 49034.67. The broader NSE Nifty tumbled 161.90 points or 1.11 per cent to 14433.70. Global equities came under pressure as the $1.9 trillion stimulus package unveiled by US President-elect Joe Biden fell short of expectations, even as jobless claimrose.

With inputs from Reuters