RBI to infuse liquidity in bond market

6 May, 2018 12:00 AM printer

NEW DELHI: The Reserve Bank of India (RBI) has moved to address pressure points in both currency and bond markets.

The central bank’s foreign exchange reserves dipped by $3.22 billion in the week to 27 April, after having fallen by $2.5 billion in the week before, according to the RBI data, report Agencies.

This is the sharpest fall in forex reserves since the week ended October 7, 2016, when the reserves had dipped by $4.3 billion. Most of the dip is to check the rupee’s rapid slide, currency dealers say.

The central bank has also tried to soothe the frayed nerves of bond dealers by announcing a secondary market bond purchase of Rs 100 billion. This, coupled with the recent measures taken to allow foreign investors to pick up any security they want without any maturity restriction, should help boost bond market sentiment by adding liquidity.

This is also an indication that the central bank will be there to help cool off yields in the future too, and should help boost the sentiment.

The rupee closed at 66.87 a dollar, while the 10-year bond yield closed at 7.73 per cent, more than one percentage point increase in about six months. The 10-year bond yield has moved up sharply after the minutes of the recent RBI’s Monetary Policy Committee’s meeting displayed a much more hawkish tone than what the April policy had stated.

RBI Deputy Governor Viral Acharya suggested withdrawal of monetary accommodation starting June, which would mean that rate hikes could be imminent. This, coupled with continued outflow by foreign investors, pushed up bond yields. Banks, fearing rising mark-to market losses, have stayed out from the market in large measures. In April alone, foreign investors have taken out $121.17 billion from the local debt market. Rising crude oil prices, twin deficits of the country and rising yields in developed countries are also exerting pressure on local yields. On Friday, primary dealers, or underwriters of government bond auctions, had to buy Rs 17.45 billion of a bond maturing in two years, against the Rs 20 billion on offer.

In this context, what has made matter even more complicated is the lack of adequate liquidity in the market.

From Rs 4 trillion in June 2017, the core liquidity in the banking system has now fallen to about Rs 400 billion. Therefore, the open market operation (OMO) purchase announcement by the RBI, which will add liquidity to the system, is a huge relief for the system.

“The policy to announce the OMO will reverse the asymmetric liquidity management of the RBI and will help bring down the elevated yields in the bond market,” said Soumyakanti Ghosh, group chief economist of State Bank of India.