The threat of an increase in bond yields is only the agenda of traders from the policy of the Reserve Bank of India

Traders in India are pinning their hopes on the central bank’s intervention to manage bond market liquidity in this week’s policy review as the market faces a record supply of debt.

The Reserve Bank of India faces the challenge of keeping bond yields in check as the government began an unprecedented annual borrowing of 14.31 trillion rupees ($190 billion) in April. At the same time, higher oil prices threaten to accelerate inflation, putting pressure on policy makers to raise interest rates.

Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd.

Benchmark 10-year yields are up nearly 50 basis points this year, although India has been relatively insulated from the increase in global rates due to lack of supply in March and a downbeat RBI. Yields jumped sharply to 6.90% on Monday.

The heavy supply impact and acceleration of global policy normalization should push the 10-year yield to a peak of 7.40-7.50% in the first half of the fiscal year, in the absence of central bank intervention, said Obasna Bhardwaj, an economist at Kotak Mahindra Bank. Ltd.

Here’s what traders say the Reserve Bank of India may think of on April 8:

fluctuation process

  • Given that the Reserve Bank of India has started to drain liquidity from the banking system, it is unlikely that it will announce direct bond purchases. But it may use open market operations and the liquidity-neutral volatility process, whereby it buys longer bonds and sells shorter-term notes, according to Deutsche Bank.
  • The Reserve Bank of India halted bond purchases announced in October. It bought 2.2 trillion rupees worth of bonds last fiscal year.

high for banks

  • The Reserve Bank of India may give banks leeway to increase their debt purchases by allowing them to hold more securities under a system that exempts bond losses from market volatility.
  • Currently, banks can hold 22% of deposits in government bonds under the so-called held-to-maturity portfolio. Shailendra Jhingan, CEO of ICICI Securities Primary Dealership Ltd, said the Reserve Bank of India could raise this ratio to 23%.

foreign currency swaps

  • The central bank announced a second buy/sell swap of $5 billion, which takes away the rupee’s liquidity by selling dollars. This may help create space for bond purchases to be made in the open market, according to IDFC FIRST Bank Ltd.
  • The Reserve Bank of India will have to provide 2 to 2.5 trillion rupees of open market support in the first half of the fiscal year, according to Citigroup Inc.

foreign exchange sales

  • The Reserve Bank of India was supporting the rupee with dollar sales in the currency market. As this intervention drains the rupee from the banking system, the Reserve Bank of India (RBI) can resort to strong foreign exchange sales, creating room for bond buying, according to Kotak Mahindra.

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