RBI policy is pre-Diwali Dhamaka for bond markets, says Kotak's Lakshmi Iyer4 min read . Updated: 09 Oct 2020, 02:37 PM IST
- RBI's announcement of doubled OMOs of ₹20,000 crore next week, first time OMOs of state development loans and On Tap TLTROs were amongst the major announcements to bring cheer to the bond markets.
All in all a policy for bond markets. Bond market participants are cherishing the slew of measures proposed by the RBI Governor in his monetary policy on Friday, to ease the financing conditions and provide for adequate liquidity. RBI's announcement of doubled OMOs of ₹20,000 crore next week, first time OMOs of state development loans and On Tap TLTROs were amongst the major announcements to bring cheer to the bond markets. The 10-year bond yield fell by 8 bps to 5.93% -- a level last seen on September 4, from its previous close of 6.015%. Market experts believe the yields should soften further on back of RBI measures.
Maintaining status quo for the second time in a row, Reserve Bank of India on Friday decided to keep benchmark interest rate unchanged at 4% but maintained an accommodative stance. Repurchase (repo) rate has been left unchanged at 3.35%.
Here's what the bond market experts have to say about the announcements in RBI Policy:
Lakshmi Iyer, Chief Investment Officer (Debt) & Head - Products, Kotak Mahindra AMC
“As expected, the MPC decided to maintain a status quo on benchmark rates. The RBI has reiterated the non-disruptive conduct of the government borrowing programme. To this effect, the OMO amounts have also been increased to ₹20,000 crore. On Tap TLTRO for bonds is a great liquidity booster and would be good for the corporate bond segment. OMOs in state development loans (SDLs) is a fantastic move and can help bring down spreads v/s central government bonds. RBI’s willingness to look through the current phase of high CPI and future expectation of CPI coming closer to the RBI’s target should work as a strong anchor for bond yields. This indeed is a pre-Diwali Dhamaka for bond markets."
Iyer went on to twitter to express her joy. Here's what she tweeted:
Avnish Jain, Head of Fixed Income, Canara Robeco Mutual Fund
“The MPC meeting unveiled plethora of measures for bond markets with some fireworks before the festive season! The rate action was on expected lines with the Committee deciding to maintain “status quo" on rates in light of high inflation in recent times as well stance being maintained as accommodative. In a first, forward guidance for stance was spelled out. The MPC said that the stance is likely to “…continue with the accommodative stance at least during the current financial year and into the next financial year". This reinforces RBI’s resolve to continue to support the economy in post pandemic recovery. There were more surprises in store in terms of liquidity measures viz. OMO size increase to ₹20,000 cr (already announced for next week), special OMOs in state development loans (first time it is happening), on tap TLTRO (targeted long term repo operations) for upto Rs1 lakh crore for specific sectors. The TLRTO can be used for investing in corporate papers as well as for giving loans and advances. Further this facility will be exempt from large exposure framework and can be classified in HTM category over and above 25% limit. This is likely to give boost to bank lending. The RBI’s measures clearly point towards its desire to maintain adequate liquidity as well as keep yields low in an environment on elevated government borrowings".
“The markets reacted positively with 10Y yields dropping by ~8 bps. The announcement of OMO stocks further consolidated the rally with good participation expected in today’s auction. Whilst near term inflation prints are likely to keep markets cautious, yields should soften on back of RBI measures. Increase in OMO purchase size to ₹20,000 cr should go a long way in helping the smooth passage of government borrowings. In the short term 10Y is likely to trade in a range of 5.80-5.95% with a downward bias".
Rajeev Radhakrishnan - Head of Fixed Income, SBI Mutual Fund
"The Policy has rightly emphasised on measures to ensure financial market stability and to guide market expectation to be aligned with the policy stance and to ensure continued transmission of policy cuts to the wider market. It was absolutely necessary to guide sentiments in government bond markets first to ensure that the same is achieved/not disrupted and corporate issuers do not eventually get crowded out apart from ensuring that government borrowings are smoothly conducted in the light of current economic challenges."
Dhiraj Relli, MD & CEO, HDFC Securities
"Announcement of OMO (including OMO for SDL) and on tap LTRO will aid pushing more liquidity into the system and keeping interest rates in check. Announcement to allow banks to increase exposure to retail and small borrowers up to ₹7.5 crore and rationalising risk weights for all new housing loans till March 31, 2022 are welcome from the borrower’s perspective but Banks need to beef up their credit appraisal processes.
Extension of the dispensation of the enhanced HTM limit of 22% up to March 31, 2022 for securities acquired between September 1, 2020 and March 31, 2021 and hint by the RBI that yields in the government securities (g-sec) market, both primary and secondary segments, also need to evolve in alignment with the comfortable liquidity conditions will help keep a lid on the Gsec yields.
MPC expects inflation to ease gradually towards its target over Q3 and Q4 as supply disruptions and associated margins/mark-ups driving up inflation would abate. RBI finally gave GDP forecast and expects a contraction at 9.5% for FY21 with downside risks.
As the economy continues to be in a fragile state, recovery in growth assumes primacy. The RBI’s intent to support the economy even in the wake of rising inflation is comforting."