The Reserve Bank on January 6 will carry a special simultaneous open market operation to buy and sell government bonds of Rs 10,000 crore each.

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In the last two weeks on Dec 23 and Dec 30, RBI bought 10-year paper and sold under one-year bonds. Now, the RBI has changed tactics and is going to buy 5-year paper.

According to MS Gopikrishnan of Standard Chartered by doing this, RBI as a strategy is trying to address all points of the yield curve. “Bulk of corporate borrowing, be it in corporate borrowing through corporate bonds or through international markets, it’s usually in the 5-year segment. So I think they are trying to address the 5-year point of the curve as well. Even when they do outright OMOs, they used to buy bonds or sell bonds across maturity. So it’s part of that strategy rather than anything else,” he added.

This operation twist by RBI is going to be the biggest driver of bond yields, he said.

Giving a range for the bonds yields, he said, till last night the range for us would have been at 6.45-6.60 percent but with the latest development there will be pressure on the bond yields to go up.

According to him, we may have seen the lower points in the 10-year bonds because of two factors, one the latest development (Iran's Gen. Soleimani killed in airstrike), which has pushed the oil prices higher and so there would be concerns on that. Two, we are heading towards the Budget on February 1, and there is general fear that the fiscal deficit would be much higher than what was projected and there could be an additional supply which could be hitting the market, said Gopikrishnan in an interview with CNBC-TV18.

“Therefore, on the back of that concern plus the latest development should push the yields higher. I would probably put yield in the range of 6.50-6.65 percent range,” he said, adding that this range is only for the next two weeks.

When asked about RBI's interest rate trajectory, he said, “The rate cuts are done and dusted. There is a possibility of a rate cut maybe after 6 months or so, but if I look at the numbers very closely - the inflation number based on strategically data, it looks like inflation will stay above 5 percent for first quarter and probably close to 4.5-5 percent in the second half of this calendar year. So, given that I don’t think there is much of room to cut rates.”

Moreover, food inflation will subside but the core inflation will start moving slightly higher. So this would leave very little room to cutting rates,” he added.