Informist, Wednesday, May 11, 2022

NEW DELHI – The Reserve Bank of India is considering further steps to manage the Centre's record borrowing programme in 2022-23 (Apr-Mar) on the lines of its move to hike the held-to-maturity limit, which would have a lasting impact on keeping gilt yields lower, a banking industry source said.

"The central bank will help in material ways," the source said.

"What does the OMO (open market operation) do? Its impact fades away in a day, but if we do substantive things, bond yields will stay low for a while."

The central bank had announced a hike in the held-to-maturity investment category, for statutory liquidity ratio-eligible government securities, to 23% in the April policy review.

RBI Governor Shaktikanta Das had then said that this was the first step in managing the government's borrowing for the current financial year.

By stashing gilts in the held-to-maturity bucket, investors can prevent trading losses in these papers, particularly in a rising interest rate environment when bond prices typically fall and drag down the valuations of their portfolios.

Direct market support through scheduled purchases of government bonds remained off the table, even as bondholders may find it difficult to digest the 14.31 trln rupees of gilts that the Centre plans to issue in 2022-23. 

"Of course, you won't see the kind of support the RBI gave the market through the Government Securities Acquisition Programme," the source said. "But that doesn't preclude open market operations, which are also a buy."

Gilt yields had risen because the market expects supply to outstrip demand, particularly as resources to invest in dated securities became more scarce with the offtake in credit growth, the source said.

Bank loans rose 10.1% on year in the fortnight ended Apr 22, according to latest RBI data.

Moreover, global spillovers, especially in terms of crude oil prices, were pushing up yields demanded by investors, the source said.

State bond supply remained muted due to the large outstanding cash balances with state governments, totalling close to 2 trln rupees, the source said.

States have raised 223.90 bln rupees from the market so far this financial year, against 705.50 bln rupees announced in the indicative calendar.  End

Reported by Aaryan Khanna

Edited by Avishek Dutta

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