The yield on the 8.24% government bond, maturing in 2018, went down sharply on 29 April, the day India’s central bank announced its annual monetary policy. Many were expecting a rate hike by the Reserve Bank of India (RBI) to fight the rising inflation, but the central bank raised the quantum of cash that commercial banks are required to keep with it to tighten liquidity and left the rates unchanged. That was the trigger for the bond rally. The price of the 10-year benchmark paper rose from Rs100.66 to Rs102.05 (on a face value of Rs100) as the yield dropped. Bond prices and bond yields move in opposite directions.
There was nothing abnormal about the movement of the yield, except that the bond prices started rising much before RBI’s decision to leave the rates unchanged was made public. The RBI governor unveils the policy to bank chiefs at 11am, but it is traditionally put on its website and flashed by news wires and television channels at noon. The sharp movement of the bond prices was seen around 11.30am. Does this mean that the information (of RBI leaving its policy rates unchanged) was leaked to the market even as RBI governor Y.V. Reddy’s meeting with bank CEOs was on?
Nobody can vouch for that but, at the same time, people are not ruling it out entirely. Data from Clearing Corp. of India Ltd (CCIL), that runs the settlement system of government bonds, shows that the trading volume on 29 April was Rs14,777 crore, about double the trading volume on a normal day. But again, this does not prove anything as normally the trading volume swells on the day of the monetary policy. Trading volume on the 10-year paper, which saw the maximum price movement, was worth Rs4,853.03 crore that day, roughly about 32% of the total volume of all government bonds.
A closer look at the trading pattern reveals that primary dealers who buy and sell government bonds were net sellers of bonds worth Rs190 crore that day. On the next trading day, however, they were net buyers of bonds worth Rs40 crore. Public sector banks were net sellers of Rs467 crore on the policy day and another Rs120 crore the day after. Private banks too followed the same trading pattern, net selling Rs354 crore and Rs215 crore, respectively, on the day of the policy and the day after.
The two sets of market players who bought heavily on that day, net of selling, were mutual funds and foreign banks. The foreign banks bought Rs950 crore worth of bonds on the policy day and followed it up by another round of Rs260 crore buying the next day. The mutual funds were net buyers of Rs270 crore worth of bonds, but net sellers of Rs325 crore the next day. Does that mean a few mutual funds and foreign banks knew well before the policy was made public that RBI would not make any change in interest rates? The chief investment officer of one mutual fund, which was seen buying heavily, however, denies any prior knowledge of the content of the policy. “In recent times, we have been bullish on long-term bonds and interest rate per se. All our investments are made in the normal course of business, backed by our research and assessment of the market,” he says.
Indeed, some bond dealers are smart and they are capable of taking intelligent decisions to make money. This is one way of explaining the phenomenon of the sudden spike in bond prices before the RBI policy was made public. But can they always get it right? Apparently, a few of them have been betting correctly on every RBI policy-day in recent times.
Theoretically, information can be leaked from RBI insiders, bank CEOs, and the media—reporters of news wires and TV channels get hold of the policy document in advance but are not allowed to disseminate information before 12.00.
As an institution, RBI has impeccable integrity. The chief of one public sector bank, who has been attending the governor’s policy meeting for a few years now, says it is practically impossible for any bank CEO to leak information as all of them sit in one room with the RBI top brass. “Can you imagine a CEO surreptitiously sending a text message from his mobile to his treasury head while the governor is discussing the policy?”
Theoretically, any leakage by the media is also highly unlikely. Reporters of wire agencies and TV channels are “locked” in RBI conference rooms till the embargo on releasing their reports is lifted. During this time, their mobile phones are switched off. News agencies are allowed to write their reports but their laptops and computers are not connected to any modem. No reporter is allowed to leave the room during the embargo period, even if it is to visit the toilet. Any breach of these rules invites sanctions in terms of the agency not being allowed to file any story on the policy.
R.H. Patil, who heads CCIL and a member of a panel that advises RBI on its monetary policy, doesn’t believe that the policy is being leaked to help bond dealers make money. “Unlike the equity market, price movement in bond market is restricted and nobody can make huge money here,” he says. That’s true.
For instance, the price of the 10-year bond moved by Rs1.38, from Rs100.66 to Rs102.05. Theoretically, if a dealer bought this paper at Rs100.70 and sold at Rs102, he could have made Rs1.30 on an investment of Rs100. So, on an investment of Rs100 crore, one could have made Rs1.3 crore.
It’s not easy to prove insider trading. One way of avoiding any leaks could be to announce the policy before market hours or even on a Saturday. But let RBI, which has started investigations into the matter, complete them.
Meanwhile, I am off for a summer break of two weeks. This column will resume on 26 May.