RBI refuses to budge on market rates
The Reserve Bank of India (RBI) on Friday made it absolutely clear that it won’t let market rates rise beyond its comfort zone, by refusing to sell almost the entire stock of the benchmark 10-year bonds at the rate markets asked for.
At the same time, the central bank seems to have briefly withdrawn from intervening in the spot currency markets, letting the rupee appreciate to a nearly six months high, even as it continued with its forwards markets intervention.
An appreciating rupee theoretically makes import cheaper and therefore controls inflation. It is considered an indirect method of raising interest rate without actually directly tinkering policy rates, which remain at an “accommodative” mode. Experts say this strategy is perhaps here to stay in the interim especially as there is no reason to believe a weak currency will expand the share of the export pie in a world under contraction.
Friday’s bond auction baffled the bond market dealers. Out of the Rs 18,000 crore of the benchmark 10-year bond on offer, RBI refused to sell Rs 17,983.75 crore. Of the competitive bids, placed by the market participants, RBI accepted just Rs 4 crore, while another Rs 12.26 crore was sold to firms, provident funds, trusts and retail investors who go for non-competitive bidding.
The rest had to be bought by the underwriters of the bonds. This is also called devolvement in market parlance. The 10-year bond yield closed at 6.14 per cent, almost the same from its previous close of 6.15 per cent after the RBI decided to keep the cut-off of the 10-year bond at 6.145 per cent.
“The near-total devolvement is a signature statement that RBI may not favour steeper curve or higher yields,” said RK Gurumurthy, head of treasury, Laxmi Vilas Bank, adding the “total rejection” is a continuation of Thursday’s open market operations where the cut-off yields were also kept low.
“The positive takeaway is that a devolvement gets funded at a reasonably lower cost and a few devolvement may not impact sentiment but carry an implicit signal that higher yields are a temporary feature,” Gurumurthy said.
A senior bond trader said such total devolvement of a benchmark bond has never happened. Government’s plan to borrow a record Rs 12 trillion from the markets has disrupted the market dynamics where there is no longer a distinction between the benchmark 10-year and other bonds. In its last auction a fortnight ago too, the benchmark had devolved partially.
“It is almost as if the RBI doesn’t need the bond market, and the investors don’t need the bonds. It is a bit bizarre when you retire a benchmark 10 year in three months and back to back the replacement benchmark gets devolved,” said a senior bond dealer requesting anonymity.
In Business Standard’s webinar series Unlock BFSI 2.O, RBI governor Shaktikanta Das defended RBI’s record in keeping money markets rates low. The governor said the 250 basis points policy rates cuts since February 2019 had transmitted fully in the bond market, and the “yields have moved up only in the last fortnight” because of statements from major global central banks.
Das categorically stated that being the government’s money manager, RBI will ensure the borrowing programme sails through and it would be done in a non-disruptive manner.
“As RBI, our endeavour is to ensure all segments of the financial markets, including bond and the currency markets, function in an efficient and stable manner. We are constantly watchful, extremely watchful, and as and when we anticipate emerging situations, we will deal with it,” the governor said.
RBI’s steadfast refusal to sell bonds on Friday’s actions were in line with that philosophy.
The government has so far in this fiscal borrowed Rs 6.5 trillion, 73.5 per cent higher than the corresponding period last year.
“So far this year, there have been 17 auctions wherein the actual amount was greater than the notified amount aggregating Rs 66,000 crore,” noted Madan Sabnavis, chief economist of Care Ratings.
The Indian rupee rose to a near six months high of 73.40 a dollar as the RBI stayed away from intervening in the spot rates.
“The fund flow has been quite robust in India leading to the RBI’s foreign exchange reserve kitty swelling. The RBI has briefly stopped buying dollars let the rupee appreciate keeping in mind dollar’s weakness globally. Yuan and Yen have risen and rupee closely tracks them,” said Satyajit Kanjilal, managing director of Forexserve. He expects the rupee to strengthen to 68 by June next year.
“The dollar index (at 92.22) is at a year’s low, and rupee is not as strong as other currencies against the dollar. So, it should continue to appreciate and could reach 72.80-72.50 against the dollar,” said Pramit Brahmbhatt, head of Veracity.
According to Rahul Gupta, head of research-currency at Emkay Global Financial Services, risk appetite globally still remains in place due to the ample liquidity infusion from major central banks as well as Fed.
Sooner or later, the RBI will come back in the spot market and intervene again. For now, the RBI seemed to be focused on the forwards markets. According to Abhishek Goenka, managing director and CEO of IFA Global, the nationalized banks are “relentlessly paying forwards on behalf of the RBI. The RBI has been buying dollars in the spot market and sterilizing the liquidity infused as a result by swapping the USD forward i.e. doing a Sell-Buy Swap.”
The banks are receiving premiums for the near term maturity and paying a premium for the longest tenure in the forwards markets, steepening the forwards rate curve in the market, Goenka said. The 3-months forward rates have gone up from 3.6 per cent to 3.90 per cent over the last three weeks, and the one year has gone up from 3.85 per cent to 4.35 per cent as a result.