The Reserve Bank of India (RBI) has stepped up sovereign bond purchases in the past two weeks to help lower borrowing costs, signalling its commitment to go beyond announced plans as growth revival temporarily trumps inflation management at Mint Road.
The central bank net purchased Rs 34,175 crore of sovereign papers between April 22 and May 4 from the secondary market to ensure lower borrowing costs amid concerns that the second Covid wave would derail the nascent economic recovery. Market experts believe that this could well be a record for a two-week period.
“Even as our economy is battling to limit the cost of a second Covid wave, the Reserve Bank is silently driving efforts to arrest the rise in yields,” said Mahendra Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India). “While unusual tools like OMOs or GSAPs are fine, such secondary market purchases should help balance the funding costs — in line with the record low-rate regime.”
The G-Secs Acquisition Programme (GSAP) and open-market operations (OMO) are the central bank’s rate-influencing tools.
The government’s principal money manager is said to have bought both Treasury Bills (T-Bills) and long-term papers in seven tranches, market sources said.
RBI bought these securities even as India’s wholesale price index surged to its highest in a decade last month, albeit on a lower base, led largely by higher transport-fuel prices.
The motive behind buying T-Bills could be to support the RBI’s Operation Twist programme, where it generally sells shorter duration papers and buys a similar quantum of long-term bonds. RBI purchases long-term papers primarily to prevent a spike in benchmark yields.
“The sole objective is to lower yields and reduce term premiums at a time when G4 yields are hardening in the wake of sharp economic recoveries in those countries,” said Dhawal Dalal, CIO – Fixed Income at Edelweiss Asset Management. “Apart from that, the RBI may have also purchased dated papers and cancelled weekly auctions with a view to lowering benchmark yields.”
RBI has been trying to keep the benchmark gauge around 6%. Between April 22 and May 4, the yield fell three basis points to 6.02%. It closed at 5.98% Tuesday, little changed from a day earlier. Since April, the RBI cancelled auctions worth Rs 39,000 crore, and these included benchmark papers worth Rs 28,000 crore and the rest from a five-year series.
A basis point is equal to 0.01 percentage point.
Bids were cancelled reportedly after the auction participants demanded higher yields, beyond the central bank’s comfort zone.
This financial year, the RBI net purchased Rs 32,220 crore via OMOs while it infused Rs 25,000 crore of liquidity via GSAP. Another tranche of Rs 35,000 crore worth of GSAP is coming up for auctions this Thursday.
The banking system has a net durable surplus of Rs 7.26 lakh crore, with the supply of securities increasing. New Delhi plans to borrow Rs 12.05 lakh crore this fiscal year.
“The central bank has been firm on its stance to ensure overall liquidity in the market,” said Srinath Sridharan, an independent market commentator. “By keeping the bond yields under check, it would help the corporates by keeping their interest costs under control. It would particularly help the mid-sized and steady-levered companies.”