MUMBAI: India’s sovereign bond market saw all its payers responded on Friday, even the silent ones. Reserve Bank of India (RBI) Governor Shaktikanta Das donned the hat of a bond whisperer by giving investors an unbridled commitment to support them.
The RBI is now open to not only injecting more targeted liquidity, but also bringing a large number of sovereign bonds to its plate. More importantly, you are willing to convert an investor into state development bonds for the first time. But Das wants the market to behave too. “Yields in the government securities market (g-sec), both in the primary and secondary segments, must also evolve in alignment with the comfortable liquidity conditions,” it said in its statement.
Starting next week, the size of open market operations (OMO) to buy government bonds will increase to ₹20,000 crore. Until now, auction sizes have been around ₹10,000 crore. Bond traders have been calling for more OMO purchases in lieu of the trading auctions the RBI conducts. In an alternative auction, the central bank ends up buying long-term bonds but sells an equal number of short-term securities. Ergo, the result is neutral regarding the size of the bond supply in the market. While Operation Twist has had some success in reducing long-term yields, the bond market needs more supply support. OMO buy auctions are preferred as they remove the supply of bonds from the market, a more efficient way to flatten the yield curve. Sure, the central bank has been buying bonds, but on the secondary market.
In addition to central government securities, the sharp rise in state government bonds also seems to have finally caught the attention of the RBI. Das said the central bank will start buying government bonds through OMO auctions, although he did not elaborate on the size or timing of such auctions. However, the fact that the RBI is willing to buy government bonds, for the first time, is enough to encourage the markets.
The intention is to make it easier and cheaper for businesses to borrow from banks and the corporate bond market. Sovereign yields and even state government bond yields influence corporate bond yields. Yields on even the best-rated corporate bonds have risen bit by bit in recent weeks. Today’s measures are clearly aimed at cooling them down. But as always, the government is the immediate and largest beneficiary of the RBI’s measures. The 10-year benchmark yield fell 8 basis points in reaction to these measures. But the RBI’s long-term repo operations (TLTROs) could ensure that profits are not left to the government alone. TLTROs on tap will allow banks to borrow from the RBI at any time and use the proceeds to buy corporate bonds or even lend to underfunded sectors.
The central bank has been in a combative mode, turning down bids at auctions to keep yields lower. Today’s statement and actions indicate a friendlier approach to markets.
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