From ‘Combative’ To ‘Cooperative’, RBI Governor Looks To Soothe Market Mood
Going into the October review of monetary policy, the Indian debt markets weren’t exactly looking cheery. The supply of government debt was high and rising, the central bank was taking baby steps in providing support via bond purchases and inflation was looking stubborn.
All this meant that bond yields needed to go higher. The central bank seemed to disagree. The result was that we saw a few successive devolvements of 10-year government bond auctions.
The market’s message hit home at the central bank, which, on Friday, threw pretty much everything at the market. From soothing words and moral suasion to more liquidity and the promise to expand its bond-buying to state government securities.
“Financial market stability and the orderly evolution of the yield curve are public goods and both market participants and the RBI have a shared responsibility in this regard,” said RBI Governor Shakitkanta Das in a statement that acknowledged the support the central bank needs from the bond markets at a time when it is in not in a position to use conventional rate cuts.
The governor went further asking bond market to drop their combative mood and turn cooperative.
Market participants, on their part, need to take a broader time perspective and display bidding behaviour that reflects a sensitivity to the signals from the RBI in the conduct of monetary policy and debt management. We look forward to cooperative solutions for the borrowing programme for the second half of the year. It is said that it takes at least two views to make a market, but these views can be competitive without being combative.Shaktikanta Das, RBI Governor
The words came with actions, although the RBI hasn’t exactly pulled out all the stops yet.
- It said it would increase the size of open market operations to Rs 20,000 crore a piece compared to its earlier standard size of Rs 10,000 crore. Yet, it didn’t give any hints on a calendar of auctions or how it would judge the need for such bond purchases.
- It gave an assurance that it isn’t rolling back its special liquidity measures by putting Rs 1 lakh crore in targeted long-term repo operations on tap. Although whether banks, already flush with funds, pick this money up, remains to be seen.
- It extended the higher held-to-maturity limit of 22% for government bonds all the way till March 2022. This will ease concerns that banks may have of a mark-to-market hit on their bond portfolio.
- The most significant of the measures announced was the RBI’s decision to buy state government bonds. It hasn’t done that so far and an intention to go in that direction signals that the central bank is mindful of the pressure the wider pool of public sector borrowings is putting on the bond markets.
- To top it all, while the MPC did not cut rates, the guidance was as dovish as it could get. The committee said it would “look through” the current bout of inflation. Five of six committee members voted to maintain an accommodative stance into next year. Essentially the central bank made a ‘lower-for-longer’ commitment on rates.
The immediate reaction from the markets was positive. The benchmark 10-year yield fell 9 basis points.
An auction of 10-year bonds on Friday also went through smoothly, with the government raising Rs 15,000 crore at a yield of 5.94%, suggesting the disconnect between the debt markets and the central bank may have eased at least for now.
Arvind Chari, head of fixed Income at Quantum Advisors summed it up well.
It’s Christmas come early for the bond markets, he said. “Everything that the bond market has asked for, the governor has delivered. It is a very, very significant policy for bond markets.”
Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.