RBI: RBI bond sales intrigue the money market

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Mumbai: In a move that has baffled the money market, the RBI has, over the past fifteen weeks, carried out a series of harmless trades that, among other things, may herald the start of a long journey to slowly mop up liquidity additional who floundered.

A rampant, but sustained, sale of bonds by the RBI – around 2,000 crore every 10 to 15 days – has become the topic of conversation in the market, leaving banks, bond houses and financial institutions like the insurers and mutual funds guess what the central bank is trying to achieve, what it might do next: is this a signal that the monetary authority is comfortable with a higher bond yield (which ultimately paves the way for higher interest rates in the economy)? Are rising yields a reflection of stiffening inflation? Is this a clue to the government that the price of a higher budget deficit would be a higher return? Or, does it mark the start of a complex process aimed at reducing the sustainable liquidity of the system?

Better, as I can tell, RBI realizes that releasing sustainable liquidity is a long process – it may take a few years. So why not continue to withdraw 5,000-10,000 crore per month and watch the market reaction every week… Probably it has started, ”said the CEO of a major bank. According to a senior official at a large bond house, even though the RBI maintains an accommodating stance, it is doing what appears to be a targeted sale because it typically does not intervene on an ongoing basis.

In isolation, these small doses of bond sales don’t matter, but a sustained sell-off over the next few months would have implications. So far, RBI has only absorbed 10,000 to 12,000 crore, a tiny fraction of the excess cash of over 7 lakh crore in the system. “Liquidity is a reason, but then why should the market complain if yields rise while inflation rises,” an RBI official said.

The yield (or return to an investor) of the 10-year GoI bond, which serves as a benchmark, has fallen from 6.30% to 6.52 / 53% in the past two months. Last year, the RBI, which had apparently tried to protect the yield at around 6%, intervened (by buying bonds) when the yield rose to 6.25%. But this time around, there were no bond purchases by the RBI even when yields hit 6.47 / 6.48%.

“If traders feel the RBI is okay with rising yields, they start to heed it. That’s what’s happening now… They’re starting to guess what the next level might be when the RBI might step in (ie buy bonds to control the rise in bond yields), ”a trader said in obligations.

A multitude of factors – from the possibility of a larger budget deficit to rate signals from the Fed, coupled with key insights like US payroll data, to actual flows – influence bond prices. . “Aside from the possible upside signals from the Fed this year, there is little or no influx of REITs into GoI bonds amid high inflation and forecasted fiscal slippage. In addition, the first two quarters were different for the local bond market where the RBI intervened by buying bonds through the G-SAP 1.0 and 2.0 programs, ”said an analyst.

“Maybe the RBI doesn’t want the spread between GoI bond yields and US Treasuries to narrow, so that REIT inflows come back. Currently the spread is around 4.8 which is quite good. The term premium in the market is currently 2.5%, which is one of the highest I’ve seen, ”said one banker.

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