Informist, Wednesday, Apr 7, 2021
By Pratigya Vajpayee and Bhaskar Dutta
NEW DELHI – The bond market is now used to hogging much of the limelight in monetary policy reviews because managing the government's burgeoning debt issuances has become a crucial part of the Reserve Bank of India's plan to keep a check on borrowing costs and foster a revival in economic growth.
Today, the market again took centrestage as the RBI announced a first-of-its-kind asset purchase programme that would give an upfront commitment on the quantum of paper that the central bank will take up on its balance sheet.
The Programme Will Be Deployed In Addition To The RBI's Liquidity Management Toolkit, Which Includes The Liquidity Adjustment Facility And Open Market Operations.
Under the newly-launched government securities acquisition programme, christened GSAP 1.0, the central bank will buy bonds worth 1 trln rupees in the secondary market during Apr-Jun, starting with a 250-bln-rupee purchase on Apr 15.
The programme will be deployed in addition to the RBI's liquidity management toolkit, which includes the Liquidity Adjustment Facility and open market operations.
This means that the actual amount of bonds that the central bank ends up buying could even be higher than what it has committed to under the new plan.
While the new scheme sounds very similar to a calendar of open market purchases, there are subtle points of difference.
As Deputy Governor Michael Patra said, this is the first time that India's central bank has committed space on its balance sheet for the conduct of monetary policy, which, in some ways, makes the new scheme comparable to quantitative easing conducted by the US Federal Reserve.
Whenever the RBI has announced bond purchase calendars in the past, the stated purpose of these was to inject durable liquidity in the banking system. For the explicit purpose of managing bond yields, the RBI has never stated a lump sum for open market operations.
Although the central bank was quite proactive with its bond purchases in the year ended March, it had good reason to state its support upfront this time around.
Knowing the minimum size of the RBI's purchases would give bond traders a clearer picture of how demand for dated securities matches up to the supply, and clarity is always a good thing.
It is even more desirable when the government is just about to flag off its 12.06-trln-rupee borrowing programme for the current financial year.
In the current quarter ending June, the government is scheduled to borrow 3.48 trln rupees on a gross basis, and 2.43 trln rupees on a net basis from the market.
The RBI has, therefore, promised to cut the net supply of central government bonds hitting the market in the current quarter by at least 41%. This will help assuage fears of bond yields spiralling out of control once the government borrowing programme goes full throttle.
Yield on the 10-year benchmark 5.85%, 2030 bond ended at 6.08% today, 4 basis points lower than its previous close.
WHAT'S THE FUSS?
As comforting as the RBI's new bond buying venture is, it is not really an incentive to stock up on dated securities.
RBI's announcement may have delighted bond traders, who are not used to seeing it put up large numbers upfront. But given the scale of the country's public debt, the extent of support that the central bank has committed to falls short.
In addition to the borrowing by the Centre, state governments are set to raise a gross amount of 1.78 trln rupees through bond issuances during Apr-Jun.
This means that the amount of purchases that the RBI has promised is around one-fourth of the net supply of government bonds during Apr-Jun.
To put it in perspective, in the quarter ended Mar 31, the RBI bought bonds worth 1.5 trln rupees under special open market operations and outright purchases; over 30% of the net amount borrowed by the Centre and state governments.
Despite the RBI's bond shopping, during this period, yield on the 10-year benchmark 5.85%, 2030 bond climbed 31 basis points, while other papers fared even worse.
In the larger scheme of things, the asset purchase programme that the RBI has embarked upon does little to alter the fundamentals of the bond market, unless the central bank ramps up the total amount of government borrowing being financed by it.
That does not seem to be the case.
The RBI clarified today that the new scheme is a part of its overall liquidity management plan for the year and does not add to the liquidity that it would have provided otherwise.
Bond investors estimate that the RBI is likely to buy securities worth up to 4 trln rupees in the current year, which falls well short of the 6-trln-rupee gap between demand and supply of bonds estimated by traders.
Consequently, a rise in bond yields is seen as being inevitable. The 10-year benchmark yield is expected to move in a range of 6.10-6.25% over the next two months.
The bond market's grouse with the RBI's bond purchases this year was not their aggregate amount, but the doses in which these were administered.
The RBI has been known to fiercely guard certain levels of bond yields on one day and unexpectedly remove its grip on another. Of course, it cannot be expected to provide absolute predictability to the bond market, but at the end of it, the market's risk appetite continues to falter.
The RBI's bond-buying programme grabbed the headlines today, but the policy contained some elements that do not augur well for the debt market.
The RBI said it will step up the variable rate reverse repo auctions that it has been conducting since January. Since mid-January, it has been conducting a 14-day variable rate reverse repo every fortnight, making banks keep 2 trln rupees constantly parked with it. It now plans to introduce more of such operations, and for longer maturities.
Even though the RBI clarified it is not looking to tighten liquidity conditions, one cannot deny that its reverse repo auctions are clearly designed to push up short-term cost of funds.
For the funds parked in such operations, banks get a return that is higher than the reverse repo rate of 3.35%. The weighted average rate that banks earned at the last 14-day reverse repo auction on Mar 12 was 3.48%.
The RBI is now offering them avenues to deploy even more funds, and at even higher rates since the upcoming reverse repo auctions will be of longer maturities. Consequently, banks will seek higher rates of return on short-term money market instruments such as treasury bills.
The other aspect that was disconcerting for bond investors was that the central bank's outlook on economic growth was not as downbeat as they would have liked it to be.
Ahead of the policy, traders were all but certain that the RBI would hint at an extended timeframe for policy accommodation, now that the number of COVID-19 cases in India have surged again. However, the RBI did no such thing.
The central bank left its GDP growth projection for this year unchanged at 10.5%, and Governor Shaktikanta Das said the second wave of COVID-19 is unlikely to be as detrimental for growth, since the economy is now better prepared than it was during the first wave.
The RBI has repeatedly assured it does not plan to step out of its accommodation mode any time soon, but bond traders can't shake off the feeling that it is edging towards the exit door. End
Edited by Mainak Moitra
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