India RBI Open to Steps Aimed at Cooling Bond Yields
(Bloomberg) -- India’s central bank would be open to bond purchases but may prefer other measures such as easing investment rules for banks to boost demand for government securities, a person familiar with the matter said.
The Reserve Bank of India may consider easing the so-called held-to-maturity investment norms for banks, allowing them to buy more debt without marking losses as these measures have more impact than open-market purchases, said the person, who declined to be identified as the discussions are private.
India’s 10-year bond yields slid 25 basis points in the past two sessions on speculation the central bank may take steps to ease rising borrowing costs for the government. The RBI will avoid pandemic-era steps such as a large scale bond-purchase program, while it will continue to give signals on borrowing costs through its weekly auctions, the person said.
“If open-market operations do eventually get announced, the RBI could look to balance out the liquidity effects so that it doesn’t hinder its efforts to fight inflation,” said Lakshmanan V, treasurer at Federal Bank Ltd.
The Reserve Bank of India is caught between its desire to contain inflation by raising rates, while at the same time managing record debt sales of 14.31 trillion rupees ($185.3 billion) for a government seeking to speed up an economic recovery.
Benchmark yields had surged 31 basis points after the RBI hiked rates in an unscheduled policy meeting last week and drained billions from the banking system.
At its April meeting, the RBI allowed banks to hold 23% of their deposits in the so-called held-to-maturity category, up from 22%. Any easing of rules will apply to bonds acquired between April 2022 and March 2023, the RBI said last month.
The central bank intervened in the foreign exchange market in the last two days to smoothen volatility and wasn’t looking to protect any level for the rupee, the person said.
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