Certain financial market segments have been experiencing a tightening of financial conditions with the heightening of risks from Covid-19, as reflected in the hardening of yields and widening of spreads, RBI said.
“It is important to ensure that all market segments remain liquid and stable and function normally," RBI said. There is no notified amount against any of these four securities within the aggregate ceiling of ₹10,000 crore, it said.
There was some tightness in the commercial paper market on Wednesday morning and government securities in that segment rose by 25-30 basis points adding to the tightness, said a banker on condition of anonymity.
Following RBI’s announcement, the yield on the 10-year benchmark bond softened to 6.213%, but later closed at 6.296%, up 3 basis points (bps) from Tuesday’s close.
“On a review of the current liquidity and financial conditions, RBI has decided to conduct open market operations on 20 March 2020 (Friday) in the form of purchase of an aggregate amount of ₹10,000 crore through a multi-security auction using the multiple price method," the central bank said.
The market is fairly illiquid at this juncture as most people are sitting tight, said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial. Meanwhile, corporate bond yields have widened by 50-60 bps across segments since 16 March, he said.
“It was a pretty thinly traded market today. Most of the asset managers plan to hold more cash to look at potential redemptions at any point and the markets are fairly volatile," said Manglunia.
RBI has been taking steps to improve liquidity and monetary transmission in the market. On 16 March, it announced up to ₹1 trillion in long-term repo operations in multiple tranches, along with a $2 billion dollar swap. The central bank, unlike its global peers, did not lower interest rates as was expected by markets earlier this week, but announced measures to boost liquidity.
RBI governor Shaktikanta Das said the central bank was ready to act and the rate cut decision will be taken by the monetary policy committee (MPC), slated to meet next month.
“Only the MPC can cut rates. Don’t rule out anything," he said. The policy space should be used appropriately and be suitably timed to optimize impact, he said.
RBI had kept its policy rates on hold in February citing higher inflationary risks throughout the first half of fiscal 2021. MPC had projected retail inflation for the first half of FY21 at 5-5.4% compared with 3.8-4% earlier. Its growth projection stands at 6%—in the range of 5.5-6% for the first half and 6.2% in the third quarter.