Wednesday, Dec 30, 2020

By T. Bijoy Idicheriah and Bhaskar Dutta

MUMBAI/NEW DELHI – The Reserve Bank of India may have recently announced a round of special open market operations but the central bank's preference, at the current juncture, lies with outright open market bond purchases, a banking source with knowledge of the matter said.

What has pushed the RBI's hand is market conditions.

"Outright OMOs were the preference but what happened is that the SDL (state development loan) OMO came a cropper, suggesting weak market appetite for more liquidity," the source said. "Which is why the latest Operation Twist was announced."

The RBI, in October, said that it would launch purchases of state government bonds in order to bring down cost of borrowing for corporate loans linked to quasi-sovereign state debt. However, at the latest open market auction of state bonds on Dec 23, the market's reaction was tepid, with the central bank rejecting all bids for papers maturing in 2031. 

The source said that the recent selloff in the newly-issued 10-year bond was essentially driven by banks' balance sheet considerations, but given the extent to which the RBI has supported the market, the central bank believes that participants "should play ball".

Since its first auction on Nov 27, yield on the current 10-year benchmark 5.85%, 2030 bond has touched a high of 5.93%. The bond was last at 5.92%.

"The markets were charging 5.95% for the 10-year (at auctions). It was priced 5.85% when it was issued," the source said. "Some participants were trying to book December quarter profits. The RBI has done quite a lot, so the markets must also play ball."

The RBI has over the last few months undertaken several measures to facilitate the smooth passage of the government's record-high 13-trln-rupee borrowing programme this year.

The steps include large-scale open market operations, long-term repos and screen-based purchases of bonds. Last week, for the first time in almost three years, the central bank cancelled an auction of the 10-year bond, ostensibly to inform the market of its discomfort with high yields demanded at the debt sale.

The market on the other, believes that the RBI needs to take off more supply from its hands especially at a time when foreign investors are largely apathetic to Indian debt and several large investors' books are full to the brim.  End

Edited by Arshad Hussain

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