RBI’s Surprise Bond Sales Plan Sparks A Selloff In India Market
Indian bonds fell the most in about a year after the central bank upped the ante against inflation by saying it may consider selling bonds to soak up excess funds from the banking system.
(Bloomberg) -- Indian bonds fell the most in a year after the central bank upped the ante against inflation by saying it may consider selling bonds to soak up excess funds from the banking system.
The yield on 10-year notes climbed as much as 11 basis points, the most since October last year, to 7.32%, after Governor Shaktikanta Das announced the plan Friday, while keeping the policy rate unchanged. “The timing and quantum of such operations will depend on the evolving liquidity conditions,” he said.
The move comes as the central bank intensifies its fight against inflation amid a surge in oil prices and a strong dollar that’s exerting pressure on the currencies of emerging markets, including India. The decision indicates a shift away from using interest rates to liquidity-management tools to control inflation, which Das said remains a major risk.
The open-market operation announcement “caught the market off guard but it shouldn’t have, because the governor has said he will take whatever measures needed for liquidity,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank Ltd. “These are measure for liquidity control rather than rates. The focus is very clearly on the 4% inflation target.”
To be sure, the RBI has been selling bonds in the open market recently, albeit in small amounts, to soak up excess liquidity. Future OMO sales will be conducted via an auction process and it not aimed at soaking up expected inflows from the JPMorgan’s inclusion of India in its emerging market debt index, Governor Das said in a briefing.
“As I have reiterated several times in my previous policy statements, excessive liquidity can pose risks to both price and financial stability,” he said, noting there’s “liquidity skew” in the banking system.
While some banks have been parking large sums with the RBI, there are others which come to the central bank seeking funds to tide over their short-term liquidity requirements, he said.
“It is desirable that banks having surplus funds explore lending opportunities in the interbank call market” and not with the RBI, he said.
Here are other key comments from traders and analysts:
- “Mentioning OMOs in policy means they may use it as a tool, in a structured way,” Akhil Mittal, fund manager at Tata Asset Management. “Till RBI comes out with clarity on amount and structure — whether it is going to be the current way of market selling or calendar based — the market will continue to remain nervous around it.”
- “They want to keep liquidity much more tighter than what the market was expecting” said Naveen Singh, executive vice president and head of trading at ICICI Securities. “They haven’t announced anything (on OMO sales) but it’s now a hanging sword.”
- “This basically means that when there is a flush of liquidity in the market, he would announce OMO sales of 100 billion rupees to 150 billion rupees to take away the liquidity,” said Abhisek Bahinipati, fixed-income trading head at Mirae Asset
- “My assumption is that if net liquidity stays above 1 trillion rupees, RBI would be happy to do OMOs of” around that much to bring it below that level.
--With assistance from Malavika Kaur Makol.
(Updates with comment in fourth paragraph)
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