Bond yields jumped on Friday after the central bank’s policy meeting amid investor concerns over market liquidity and the government’s 12.06 trillion Indian rupee ($165.56 billion) borrowing programme.
While the Reserve Bank of India has kept rates at historic lows and pledged to provide liquidity to keep markets order, investors have been disappointed by the lack of clarity regarding this support, no timetable for purchase of bonds not having been published.
“RBI has assured us that borrowing for 2021/22, yields will be comfortable and we expect them not to exceed 5.9% for the financial year,” one of the two sources said.
He added that the government’s long-term average borrowing cost is expected to be between 5.8% and 5.9% in the fiscal year beginning in April.
“The RBI has shown it won’t blink as the auction results show,” said a second source who asked not to be named as he was not authorized to discuss the matter publicly.
Amid broader market turmoil on Friday, the central bank sold just 90 billion rupees of bonds against the 310 billion it had planned to sell, with underwriters buying 88.1 billion rupees worth of paper, after that the market demanded higher returns.
“The RBI has done everything the market needed and wanted all last year, so they have to trust the central bank. There is no talk of a timetable for open market operations (OMOs) “, added the source.
The source explained that an OMO timetable was not feasible as OMO scheduling usually depended on the less certain timing of RBI dollar buying interventions in the foreign exchange market, which free up liquidity in rupees.
The RBI did not immediately respond to questions while the finance ministry declined to comment.
The sources said that given that there has been no change in macroeconomic conditions and that interest rates and liquidity conditions remain the same, there is no reason for yields to long term increase.
The central bank reiterated on Friday that its policy should remain accommodative for at least the current fiscal year.
The second source said an RBI decision allowing banks to hold more bonds in their held-to-maturity category for an additional year until March 2023 protects them from valuation losses. while direct access to government bonds for retail investors will also be facilitated. market pressure.
The sources said the RBI could use open market purchases, long-term repos or other tools to pump rupees back into the system, after restoring a higher cash reserve ratio for banks. from March. These infusions will likely be around Rs 3 trillion, they said.
“The confrontation between the markets and the RBI could keep yields high in the short term,” said Madhavi Arora, economist at Emkay Global. “However, any premature tightening of the financial situation is undesirable at this stage.”