Sovereign bonds in India rallied after the central bank stepped up measures to crack down on rising yields following a series of weak debt auctions.
The 10-year government bond yield plunged 18 basis points, the most since May 13 when a new benchmark was introduced, to 5.93 per cent. The yield on the five-year debt also dropped 22 basis points to 5.26 per cent.
The Reserve Bank of India gave banks leeway to hold more government bonds without marking to market, while also announcing plans on Monday to conduct $16.3 billion worth of repurchase operations and Federal Reserve-style Operation Twists. Benchmark yields rose almost 30 basis points in August, the most since 2018, after a spike in inflation spurred bets that the central bank won’t be able to cut rates.
“The RBI is telling the market that when we say whatever it takes, well follow it up with actions whenever its required,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. The intent is very clear. The RBI wants yields lower than what they are currently.
The RBI needs to keep borrowing costs under control with the economy suffering its worst quarterly contraction on record, and the government out to sell a record 12 trillion rupees of debt. The market has been concerned that Prime Minister Narendra Modi’s government will exceed the borrowing targets to revive a virus-ravaged economy.
“The RBI is going all out. I don’t think anybody will have the guts to bet against the RBI in the short run,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd.
The central bank on Friday also sent a strong signal over rising bond yields by setting a lower level than most bids at an auction. It then asked underwriters to pick up nearly the entire benchmark bond on sale.
Bank purchases
The RBI’s approach to address excess bond supply has been more modest than its high-yielding rival Indonesia, which has waded deep into debt monetisation. Still, it has cut rates by 115 basis points in 2020 and conducted discreet secondary market purchases.
Banks may now have room to buy another 3.6 trillion rupees of debt without worrying about price fluctuations with the RBI’s rule relaxation, according to IDFC Asset Management Ltd.
“This is a multi-pronged response – reinforcing forward guidance, extending Twist operations, time-bound hike in held-to-maturity limits and allowing banks to reprice LTROs,” said Suyash Choudhary, head of fixed income at IDFC Asset. This clearly puts to rest any dissonance in the market.