Traders in India are pinning their hopes on the central bank stepping in to manage bond-market liquidity at this week’s policy review as the market confronts record debt supply.
The Reserve Bank of India faces the challenge of keeping bond yields in check as the government kicks off an unprecedented 14.31 trillion rupees ($190 billion) of annual borrowing in April. At the same time, surging oil prices threaten to accelerate inflation, putting pressure on policy makers to hike rates.
“Support from the RBI in the form of open-market purchases is crucial to keep yields contained, given the large borrowing program and an environment of rising global yields,” said Gaura Sen Gupta, an economist at IDFC FIRST Bank Ltd.
The impact of heavy supply and faster global policy normalization should push the 10-year yield to a peak of 7.40-7.50% in the fiscal first half, in the absence of central-bank intervention, said Upasna Bhardwaj, an economist with Kotak Mahindra Bank Ltd.
Here’s what traders say the RBI may consider on April 8:
Operation Twists
Headroom for Banks
FX Swaps
- The central bank has announced a second $5 billion dollar-rupee sell/buy swap, which takes out rupee liquidity by selling dollars. That may help create space to conduct open-market bond purchases, according to IDFC FIRST Bank Ltd.
- The RBI will have to provide 2–2.5 trillion rupees of open-market support in first half of the fiscal year, according to Citigroup Inc.
FX Sales
- The RBI has been supporting the rupee with dollar sales in the currency market. As this intervention leads to a draining of rupees from the banking system, the RBI can resort to aggressive FX sales, creating room for bond purchases, according to Kotak Mahindra.
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