The Reserve Bank of India (RBI) on Friday sought to address the ‘disconnect’ with the bond markets through a combination of words and action.
Three recent auctions of government securities conducted by the RBI have devolved as the markets demanded a higher yield, which the government was not prepared to concede.
Market participants are apprehensive that the Centre may borrow more and that elevated inflation will force the RBI to go in for an extended pause in its interest rate cycle.
On Friday, RBI governor Shaktikanta Das finally chose to address the burning issue.
Consequently, bond prices rallied with yields on the benchmark 10-year security falling by 10 basis points to 5.92 per cent. It later settled at 5.93 per cent.
Asking the bond market participants to be “competitive without being combative”, Das said they needed to take a broader time perspective and display bidding behaviour (in the auctions) that reflects a sensitivity to the signals from the RBI in the conduct of monetary policy and debt management.
“Yields in the government securities market, both primary and secondary segments, need to evolve in alignment with the comfortable liquidity conditions.”
Das said the weighted average cost of borrowings by the Centre during the first half of 2020-21 at 5.82 per cent was the lowest in the last 16 years. He added that the RBI had assured that the borrowing programme of the Centre and the states for the rest of 2020-21 would be completed smoothly.
The RBI said it would maintain comfortable liquidity conditions and conduct market operations in the form of outright and special open market operations (OMOs). It raised the weekly size of OMOs through which it buys bonds to Rs 20,000 crore from Rs 10,000 crore. Further, it extended the held-to-maturity relaxation for banks’ investment in government bonds till March 31, 2022. These are investments held till their maturity.
On-tap LTRO
The RBI will conduct on-tap targeted long term repo operation (TLTRO) with tenors of up to three years for a total of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021 with flexibility on raising the amount and term.
