The Reserve Bank of India (RBI) will do its first Open Market Operations (OMO) purchases of Rs 10000 crore of bonds on May 17.
The union finance ministry also said that there will be more OMO from the central bank this year.
While Bank of America Merrill Lynch estimates that the total purchases this year could be Rs 1.4 lakh crore. This include the buyback and if one were to exclude the buyback, then the RBI last year did not buy any bonds, in fact sold bonds.
In the meantime, ICICI Securities estimates the OMO purchases this year could Rs 1 lakh crore net of buybacks.
To find out what is behind their calculations and what will be the impact on bonds, CNBC-TV18 spoke to Abhishek Upadhyay, ICICI Securities Primary Dealership and Indranil Sengupta of Bank of America Merrill Lynch.
"The extent of OMO purchases is essentially a function of how much currency demand you expect in FY19 and how much of it gets offset by the RBI intervention operations," said Upadhyay.
The estimation of Rs 1 lakh crore in terms of OMO purchases for FY19 is based on crude price forecast of $75/bbl on average this year, he said.
The impact on bond yields is an impact due to variety of factors like crude prices, inflation etc, he said, adding that, they expect the bond yields to trade in range of 7.5-8%. The bias is for higher yields in the near-term.
According to him, markets will enter June fearing a rate hike.
However, bond markets react much in advance of rate hikes, and they have already priced in 3-4 hikes. So, when actual rate hikes are delivered, one should not expect a renewed sell off, said Upadhyay.
Meanwhile, Indranil Sengupta said they expect Rs 1,50,000 crore OMOs form RBI if crude stays at current prices but a lot would depend on where oil prices go.
“We think OMOs should lead to excess demand in G-Sec market and bring down yields in second half of the year,” said Sengupta.
He said it is hard to set range for bond yields because there are so many moving parts but as inflation comes down and RBI OMO picks up in second half, one could see a strong rally. So, yields could be around 7% by end of this year, he added.
Going forward, Brent crude would average around USD 64/barrel this year, he said.
However, there could be a risk to that as well. The house expects a rate cut by RBI in August, said Senggupta.