RBI measures help bring 10-yr govt bond yield down by 17 bps, lowest in 3 months2 min read . Updated: 01 Sep 2020, 10:45 AM IST
- The 10-year bond yield was trading at 5.944%, its steepest decline since 13 May, from its previous close of 6.117%
- RBI took multiple measures to infuse liquidity into the market and reduce cost of funds for banks
The yield on government 10-year bonds fell over 17 basis points on Tuesday, the most in three months, after the Reserve Bank of India (RBI) announced measures to allay the market fears over rising yields and higher borrowing programmes.
The 10-year bond yield was trading at 5.944%, its steepest decline since 13 May, from its previous close of 6.117%. Bond yield and prices move in opposite directions.
RBI increased the held to maturity limit from 19.5% to 22%. It also announced additional open market operations (OMO) worth ₹20,000 crore and term repo operations worth ₹1 trillion to infuse liquidity into the market.
In order to reduce the cost of funds for banks, RBI also allowed them to swap the funds raised under long term repo operations (LTRO) at 5.15% with new funds made available under the ₹1 trillion repo window at 4%.
"This is arguably the most potent of the announcements made, and one that has been on the market’s wishlist for a very long time. So, the RBI has allowed an additional 2.5% of deposits for banks as HTM for the second half of the current financial year (September-March). This allows an additional purchase capacity of approximately ₹3.6 lakh crore for banks without worrying about fluctuation risks over this period," said Suyash Choudhary, head-fixed income, IDFC AMC in a note.
"Given the heavy borrowing ahead... one shouldn’t expect a very large sustainable rally in bonds basis just the current set of triggers, although one should reasonably expect most of the recent aggressive sell-off to get unwound", IDFC AMC report added.
RBI assured that it is ready to conduct market operations as required through a variety of instruments so as to ensure orderly market functioning. The central bank also assured that it remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of Covid-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability. It also assured that the government borrowing programme of the Centre and states for the year 2020-21 will be completed in a non-disruptive manner.
On Monday, the government announced that the economy contracted by 23.9% in the first quarter of fiscal year 2021, sharper than the rest of the world.
"The current weak economic conditions requires a more aggressive fiscal response, but budgeted fiscal support has been limited, while monetary policy is hamstrung due to inflation. Given our expectation that the current inflationary pressures will eventually ebb, we maintain our outlook of cumulative 50bp of rate cuts by the Reserve Bank of India (RBI), starting from December," said Nomura Research in a note to its investors.
"We also expect a second round of targeted fiscal support in coming months, although it remains unclear if the government will provide a large scale demand stimulus. Finally, we expect fiscal-monetary policy co-ordination going ahead, as the RBI endeavours to keep long-term government bond yields low, to ensure smooth financing of higher fiscal deficits," Nomura report added.
Meanwhile, the rupee opened 0.57% higher to 73.12 a dollar.