In short, a policy for the bond markets. Bond market participants are appreciating the large number of measures proposed by the RBI governor in his monetary policy on Friday to ease financing conditions and provide adequate liquidity. RBI’s announcement of OMO duplicates of ₹Rs 20 billion next week, the first-time state development loan OMOs and On Tap TLTROs were some of the biggest announcements to perk up the bond markets. The yield on the 10-year bond fell 8 bps to 5.93%, a level last seen on September 4, from its previous close of 6.015%. Market experts believe that yields should soften further thanks to RBI measures.
Maintaining the status quo for the second time in a row, the Reserve Bank of India decided on Friday to keep the benchmark interest rate unchanged at 4%, but maintained an accommodative stance. The repurchase rate (repo) has remained unchanged at 3.35%.
Here’s what the bond market experts have to say about the announcements in the RBI Policy:
Lakshmi Iyer, Chief Investment Officer (Debt) and Chief Product Officer, Kotak Mahindra AMC
“As expected, the MPC decided to maintain a status quo in reference rates. The RBI has reiterated the nondisruptive conduct of the government’s loan program. To this end, the amounts of OMO 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 on State Development Loans (SDLs) are a fantastic measure and can help reduce spreads against central government bonds. The RBI’s willingness to analyze the current phase of high IPC and the future expectation that the IPC will move closer to the RBI target should serve as a solid anchor for bond yields. In fact, this is a pre-Diwali Dhamaka for the bond markets. “
Iyer took to Twitter to express his joy. This is what he tweeted:
Avnish Jain, Director of Fixed Income, Canara Robeco Investment Fund
“The MPC meeting revealed a lot of measures for the bond markets with some fireworks ahead of the holiday season! The action of the rate was in the expected lines and the Committee decided to maintain the “status quo” in the rates in light of the high inflation in recent times, as well as the position remained as accommodative. At first, the future orientation for the posture was explained. The MPC said the stance “… is likely to continue the accommodative stance at least through the current financial year and into the next financial year.” This reinforces RBI’s determination to continue supporting the economy in the post-pandemic recovery. There were more surprises in store in terms of liquidity measures, viz. Increased size from OMO to ₹20,000 cr (already announced for next week), special OMOs on state development loans (the first time it happens), TLTRO on tap (long-term specific buybacks) for up to Rs1 lakh crore for specific sectors. The TLRTO can be used to invest in corporate papers, as well as to make loans and advances. In addition, this facility will be exempt from the large exposure frame and can be classified in the HTM category above the 25% limit. This is likely to boost bank loans. The RBI’s actions clearly point to its desire to maintain adequate liquidity, as well as to keep yields low in an environment of high government lending. “
Markets reacted positively with 10-year yields falling ~ 8bp. The announcement of OMO shares further consolidated the rally and a good turnout is expected in today’s auction. While short-term inflation impressions are likely to keep markets cautious, yields should soften under RBI measures. Increase the size of the OMO purchase to ₹20,000 cr should go a long way in facilitating the approval of government loans. In the short term, 10 years is likely to trade in a 5.80-5.95% range with a downward bias. “
Rajeev Radhakrishnan – Head of Fixed Income, SBI Mutual Fund
“The Policy has rightly emphasized measures to ensure financial market stability and to guide market expectations to align with the policy stance and ensure the continued transmission of policy cuts to the wider market. It was absolutely necessary to direct sentiment in the government bond markets first to ensure that the same is achieved or not interrupted and that corporate issuers are not crowded out, as well as ensuring that government borrowing goes smoothly through. in light of current economic challenges. “
Dhiraj Relli, CEO and CEO of HDFC Securities
“The announcement of OMO (including OMO for SDL) and immediate LTRO will help drive more liquidity in the system and keep interest rates in check. Announcement to allow banks to increase their exposure to retail and small borrowers up to ₹7.5 crore and streamlining risk weights for all new home loans through March 31, 2022 are welcome from a borrower perspective, but banks need to strengthen their credit assessment processes.
Extension of the waiver of the improved HTM limit of 22% until March 31, 2022 for securities acquired between September 1, 2020 and March 31, 2021 and hint by the RBI that returns in the government securities market (g-sec), both the primary and secondary segments, which must also evolve in line with comfortable liquidity conditions, will help control Gsec’s returns.
MPC expects inflation to gradually relax toward its target during the third and fourth quarters as supply disruptions and associated margins / margins driving inflation decrease. The RBI finally delivered the GDP forecast and expects a 9.5% contraction for fiscal year 21 with downside risks.
As the economy remains in a fragile state, recovery in growth takes precedence. The RBI’s intention to support the economy even after rising inflation is reassuring. “
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