Home >Markets >Mark To Market >Bend it like RBI’s Das: yield curve management takes centre stage

There is one curve that India’s central bank is determined to flatten—the yield curve. Even as covid-19 infections surge in an unmistakable second wave, Reserve Bank of India (RBI) governor Shaktikanta Das knows he can do little about it than practice protocols himself. But the yield curve is in his power to bend.

Das announced that the RBI would buy 1 trillion worth of government bonds from the secondary market in the first quarter of FY22.

Calling it the secondary market G-sec acquisition programme (G-SAP), Das said the RBI will commit a specific amount upfront for open market purchases of bonds.

Buying spree
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Buying spree

The tantalizing prospect of more such purchases in the coming quarters has also been dangled.

In essence, this is a calendar for open market operations (OMOs), a longstanding demand from the bond market. What’s more is that this is in addition to all other liquidity operations, including OMO auctions, that the RBI conducts. Market participants are hoping that Das would take at least 4-5 trillion worth of bonds off their backs through the G-SAP.

The benchmark 10-year bond yield dropped 10 basis points on Wednesday on such hopes. One basis point is one-hundredth of a percentage point.

“The RBI aims to provide guidance to the bond market on an assured size of its secondary market purchases. The need for such a quantitative target was felt as bond yields have seen significant upward pressure since the Budget for FY2021-22, which placed the quantum of borrowings largely unchanged compared to the record market borrowings in FY21," Gaurav Kapur, chief economist, IndusInd Bank, said in a note.

In FY21, the central bank bought 3.13 trillion worth of government bonds. But since the Centre’s borrowing was a humongous 13 trillion, the RBI ended up absorbing just a quarter of the total bond supply for the year.

The fatigue in the bond market was evident during the past three months, where a bunch of auctions saw tepid demand and cancellations too.

Meanwhile, the central bank pulled up bond vigilantes demanding higher yields, by saying that they are endangering the growth recovery process. In short, Das has stopped at nothing to bend the yield curve. From OMOs to moral suasion, he has used all tools. But there are pitfalls in going deeper into yield management. With the RBI digging in deep into bond yields, the curve no longer reflects long-term inflation trends or even the loose fiscal policy needed to fight the pandemic. Deputy governor Michael Patra agrees that committing the balance sheet of the central bank this way has the potential to go awry.

“But that is a risk we are taking," he said. This risk needs to pay off or the RBI is setting itself up for another foe — inflation. “Elevated inflation and negative real rates can create their own distortions such as encouraging investment in physical assets such as gold, which in turn can pressure external balances (via high gold imports) and lower potential growth (via lower financial savings)," Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets (India) Pvt. Ltd said in a 7 April note to clients. “We believe the RBI is cognizant of these factors, and will embark on a gradual exit from loose monetary policy as the current pandemic wave subsides and the vaccination drive reaches critical mass towards end-2021," she added.

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