BackWith slew of measures, RBI’s Das becomes the bond whisperer
Governor Shaktikanta Das said the central bank will start buying state bonds through OMO auctions although he didn’t elaborate on the size or timing of such auctions
PremiumMUMBAI: India's sovereign bond market saw all its payers answered on Friday, even the silent ones. Reserve Bank of India (RBI) governor Shaktikanta Das donned the hat of a bond whisperer by giving investors an unbridled commitment to support them.
The RBI is now open to not only pump in more targeted liquidity but also take a large helping of sovereign bonds onto its plate. More importantly, it is willing to turn an investor in state development bonds for the first time. But Das wants the market to also behave. “Yields in the government securities (g-sec) market, both primary and secondary segments, also need to evolve in alignment with the comfortable liquidity conditions," he said in his statement.
Starting next week, the size of the open market operations (OMO) to buy government bonds will be increased to ₹20,000 crore. So far, auction sizes have been around ₹10,000 crore. Bond traders have been asking for more OMO purchases instead of the operation twist auctions the RBI conducts. In a twist auction, the central bank ends up buying long-term bonds but sells an equal amount of short-term securities. Ergo, the result is neutral on the size of the bond supply in the market. While operation twist has been somewhat successful in bringing down long-term yields, the bond market needs more support on supply. OMO purchase auctions are preferred as they take away bond supply from the market, a more effective way to flatten the yield curve. To be sure, the central bank has been buying bonds but from the secondary market.
Besides central government securities, the sharp rise in state government bonds also seems to have finally caught the attention of the RBI. Das said that the central bank will start buying state bonds through OMO auctions although he didn’t elaborate on the size or timing of such auctions. Nevertheless, the fact that the RBI is willing to buy state bonds, a first for it, is enough to cheer markets.
The intent is to make it easier and cheaper for corporates to borrow from banks as well as the corporate bond market. Sovereign yields and even state government bond yields have a bearing on the yields of corporate bonds. Yields on even the top-rated corporate bonds have been inching up in the past few weeks. Today’s measures are clearly targeted in cooling them. But as always, the government is the immediate and biggest beneficiary of the RBI’s measures. The 10-year benchmark yield dropped 8 basis points in reaction to these measures. But the RBI’s on-tap targeted long-term repo operations (TLTRO) could ensure that the benefits do not remain with just the government. On tap TLTROs will enable banks to borrow from the RBI any time and use the proceeds to buy corporate bonds or even lend to fund-starved sectors.
The central bank has been in a combative mode, rejecting bids at auctions to make yields remain lower. Today’s statement and measures indicate a more friendlier approach to markets.
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