Gilts slump as RBI stops bond buying

Gilts slump as RBI stops bond buying

NEW DELHI: Sovereign bonds slumped, with yield on the 10-year benchmark paper rising past the psychologically significant 6.30% mark, as the Reserve Bank of India on Friday said there is no requirement for a fresh round of the ‘Government Securities Acquisition Programme’ at the moment.

The paper touched a high of 6.31% today and was last at 6.29%, two basis points higher than previous close. Bond prices and yields move inversely.

At its fourth bimonthly policy statement for 2021-22 (Apr-Mar), RBI’s Monetary Policy Committee left the repo rate and the reverse repo rate unchanged at 4.00% and 3.35%, respectively.

While the status quo on interest rates was welcomed, given the recent speculation of RBI hiking the reverse repo rate, the central bank made it very clear that it would now act on reining in the huge surplus of liquidity in the banking system.

This is widely perceived as a precursor to narrowing of the liquidity adjustment corridor, which is currently at 65 basis points – the distance between the repo rate and the reverse repo rate.

Governor Shaktikanta Das said a larger quantum of funds to be drained from the banking system in tranches through variable rate reverse repos – starting from Rs 4 lakh crore on Friday to Rs 6 lakh crore on Dec 3.

Das also said the current tenure of 14-day variable rate reverse repos could be complemented by 28-day reverse repos – a distinct sign of RBI’s intention to moderate the surfeit of liquidity in the banking system.

While the market had made peace with an increased size and tenure of reverse repo operations, the disappointment stemmed from RBI’s non-committal approach to government bond purchases.

In the first two quarters of this financial year, the central bank had made upfront commitments to buy bonds under the ‘GSAP’ programme, and had effectively reduced the market’s supply burden by more than Rs 2 lakh crore.

While Das did say that RBI was open to all types of open market operations and stressed on the importance of the orderly evolution of the sovereign yield curve, the market is now left with a demand-supply dynamic that is bereft of upfront and scheduled buying support from the central bank.

This year, the government is slated to borrow Rs 12.05 lakh crores from the debt market.

Losses were, however, limited as several dealers said RBI itself stepped into the secondary market to bring the 10-year bond back from the 6.30% level.

The rupee depreciated along with bonds, and the domestic currency last quoted at 74.9850 to the dollar, weaker than 74.7750 at previous close as RBI’s steps were seen as a precursor to monetary policy tightening, dealers said.

Unlike advanced economies, where higher interest rates benefit currencies on account of increased capital flows, the rupee typically weakens when interest rates head north, as the phenomenon causes outflows from the domestic equity market.

The stock market, however, held steady, with the benchmark indices ruling near the day’s highs aided by the MPC’s assurance of continued accommodative stance and a gradual normalisation of pandemic policies.

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