RBI extends olive branch to bond mart with upfront purchase offer
07 Apr 2021
MUMBAI: The Reserve Bank of India Governor may not call the tussle between the central bank and the bond market since the Budget announcement a “fight”, however, on Wednesday he extended a peace gesture to the market by committing to conduct special government bond purchases of Rs 1 lakh crore upfront this quarter.
Das announced that the central bank has decided to put in place a secondary market government securities acquisition program that is separate from its usual open market purchases and special OMOs to keep ample liquidity in the system. In order to show RBI’s commitment, Das said the central bank will purchase gilts worth Rs 25,000 crore in an auction on April 15.
“We will also continue to deploy other liquidity management tools to ensure financial conditions are supportive for all stakeholders. Endeavour is to ensure orderly evolution of yield curve, governed by fundamentals and to askew any specific level,” said Das.
The olive branch was received well by the bond market as the yield on the benchmark 10-year government bond fell by nearly 6 basis points to 6.078% after the RBI governor’s speech ended.
RBI’s special acquisition program is significant as it can help mop-up nearly a third of the Rs 3.5 lakh crore of new government paper supply that is expected to hit the market in the June quarter.
Bond traders had been anxious about the market’s ability to absorb the large supply of bonds planned by the government in the current financial year due to rising threats from higher inflation and increase in global bond yields.
The government in February said it will borrow over Rs. 12 lakh crore in 2021-22, however, as per the borrowing calendar around 60 per cent of the borrowing may be done in April-September alone.
“There is no fight between the central bank and the bond market. We are stressing on an orderly evolution of the yield curve and not sudden spikes. A disorderly evolution of bond yields will be an impediment to growth,” Governor Das had said in March.
Throughout the course of last two months, bond traders have revolted against the central bank’s efforts to cap any rise in government bond yields given the evolving macro-economic scenario and the large government supply of papers.
“It (special acquisition plan) could help in the cool off in bond yields and support the government’s market borrowing program,” said Deepthi Mathew, Economist at Geojit Financial Services.
For Das, the hope is that the central bank’s move will help rebuild trust with the bond market which had in recent months all but gone. “I would urge market participants to take heed of our actions, communication and signals in a balanced manner. Together, we can overcome the challenges and lay the foundations for a durable recovery beyond the pandemic,” Das said.