Exit polls may not have enthused bond traders like their peers in equity and forex markets. Yields are down just six basis points this week. However, bond investors should remember that the biggest buyer, the Reserve Bank of India (RBI), is still around.

After having to binge on bonds in FY19, RBI has bought another 25,000 crore worth of bonds so far this month. That is more than a quarter of the scheduled supply from the government for the month. The central bank has also cut its policy rate by a cumulative 50 basis points since January and infused more liquidity through forex swaps.

As a bond trader from a large private sector bank noted, “Election results have been a key overhang and once that uncertainty is behind, bond yields could drop, given the indications from RBI on open market purchases." Equity market investors seem to have taken the exit poll results almost at face value, but bond traders are waiting for the election results on Thursday.

Bond yields have eased since the general elections began in April. Barring the brief scare from rising global oil prices, bonds have mostly escaped the liquidity crunch, mainly because of the central bank’s assurances that bond purchases are still an option for infusing liquidity.

Bank of America Merrill Lynch estimates that RBI will infuse $35 billion (roughly 2 trillion) of liquidity in FY20. “With our BoP (balance of payments) estimates placing RBI forex intervention at $9 billion, our stress tests suggest that RBI OMO (open market operation) should clear the G-sec (government securities) market in most cases," it said in a recent note.

In short, RBI could absorb at least a quarter of the scheduled bond supply in FY20.

So what if the new government strays on fiscal prudence a bit? The government’s banker is ready to stand as a buyer and spare the market a big onslaught of supply. The economy cannot afford an increase in borrowing costs. That means RBI will have to keep the risk-free sovereign yields benign for it to poke bankers on their transmission skills.

What’s more salutary for bonds is the benign inflation readings, which makes it easy to argue for rate cuts. Headline inflation has remained below RBI’s target of 4% for nearly nine months. The central bank has obliged with rate cuts twice already, and its six-member committee is likely to vote for one or two more cuts in the rest of FY20.

That said, the outcome of elections on Thursday will have a bearing on yields. An unexpected result could hurt sentiment. Even so, bond traders would be back to acknowledge RBI’s accommodative stance on interest rates and its readiness to keep buying bonds.

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