It’s not typical of the Reserve Bank of India (RBI) to abruptly change its schedule of open market operations. So when it did so this week, it raised eyebrows. Instead of bond purchases of ₹50,000 crore each on 5 and 12 February, those two bouts of bank liquidity injection will now take place on 29 January and 5 February.
Why this urgency? Banks are short of cash and bond yields have spiked, putting RBI in a bit of a spot as the government’s debt manager. The yield on 10-year securities has hit an 11-month high of about 6.7%. Broad blame for hardening yields can be assigned to bond issuances planned by states, raising concerns of oversupply, the held-off inclusion of Indian bonds in a global index and rupee weakness, among other factors.
But one could also read recent yield upmoves as a market response to fiscal-policy expectations. For debt-reduction comfort, a spend-heavy Union budget would need the aid of faster nominal GDP growth than this year’s 8% estimate. Right now, the gap between output expansion in rupee terms and yields is rather too small. While RBI bond-buying might soften the latter, perhaps investors will be calmed by budget numbers.