The central bank has extended the concessions it gave banks on held-to-maturity portfolios for another year in order to help the bond market swallow the borrowing, and has stated that it would use all resources at its disposal to control liquidity.
The central banker has gone to great lengths to ensure that the government can borrow $12 trillion from the markets without breaking a sweat in fiscal year 22. The Reserve Bank of India (RBI) issued a statement today aimed at calming the bond market amid concerns about liquidity, encouraging people to buy bonds directly from the bank, and predicting low retail inflation.
Bond investors were given a rude awakening by the Union Budget, which revealed higher-than-expected gross market borrowing as well as a fiscal deficit estimate of 6.5 percent of GDP, compared to a forecast of about 5.5 percent. Bond traders pushed yields higher after the budget, which increased by 20 basis points. A basis point is a tenth of a percentage point. Since then, the 10-year benchmark bond yield has remained above 6%, a level that the RBI had carefully guarded previously.
Governor Shaktikanta Das aimed to calm the bond market and dispel some “misconceptions about liquidity” in his morning virtual address. He mentioned that the liquidity stance remains accommodating, and that the return of variable repo auctions should not be interpreted as a shift in this stance.
The central bank has extended the concessions it gave banks on held-to-maturity portfolios for another year in order to help the bond market swallow the borrowing, and has stated that it would use all resources at its disposal to control liquidity. To be certain, the cash reserve ratio (CRR) will be restored to 4% as planned. However, the reconstruction is often phased, with the restoration taking place over two time spans rather than all at once. As a result, the CRR restoration aims to prevent short-term rates from straying too far from what the RBI considers to be acceptable.
Despite this, the bond market did not seem to appreciate the restoration. Following the announcement of the proposal, yields increased by around 11 basis points. Bonds are fungible, which explains why. Bond investors use the overnight market to borrow money to invest and profit from the spread. The overnight rate and other short-term rates would rise as the CRR was restored. The possibility of a whiplash effect on long-term yields cannot be avoided. The bond market has also been irritated by the lack of consistent guidance on the RBI’s bond purchases.Bond holders had hoped that Das will pledge to buy more than the RBI has done in open market operations so far. But, as usual, Das sounded cryptic at best. However, in a press conference, deputy governor Michael Patra said that the effect of the CRR restoration will be supplemented by other routes. This indicates that OMO bond purchases would become more frequent.
The bond market is already irritated by the immediate decline in liquidity surplus. However, this is unlikely to be the case in the coming days. Governor Das is hopeful that public opinion will change. The issue now is whether the RBI is still comfortable with a 6-percent yield on the 10-year benchmark bond.