Bonds

RBI’s ‘Open Mouth Operation’ keep yields on leash


Mumbai: Indian bond yields have stayed under the lid as RBI governor Shaktikanta Das talking down expectations appears to be working, despite a surge in borrowing costs for governments across the world with central banks pedalling back ultra-loose monetary policies.

The verbal assurance that liquidity will be in abundance, which market pundits label ‘Open Mouth Operations’, a phrase borrowed from the central bank’s open market operations to influence market direction, has led to Indian yields rising just about 8 basis points since the Russia-Ukraine war began on February 22, compared with 42 bps in the US – reflecting the hope that RBI would be able to keep rates low.

“Market is relying on RBI’s dovish communication, which in turn is prompting people to believe that not only any rate action is still a distant reality, but also that RBI will keep the borrowing cost at a benign level amid growth concerns,” said Soumyajit Niyogi, associate director at India Ratings.

“If the gap between the expectations and the reality stays for long, that could turn out to be another source of volatility and eventually risk to stability in the financial market going ahead,” he said.

During the war-infested period, shorter duration sovereign securities – Treasury Bills yielded about 9-11 basis points higher, show latest available data from Financial Benchmarks India.

In the same period, similar maturity US Treasury Bills yielded 17-52 bps higher.

“RBI ‘talk’ has assuaged the market backed by the fact that there is no fresh borrowing from the government,” said Madan Sabnavis, chief economist at Bank of Baroda. “This has also played a role. Also, the RBI has held on to the view that inflation is only transitory that has added to the comfort.”

“The constant reiteration by RBI in a different forum on these issues of growth and inflation has helped to keep bond yields in a corridor,” Sabnavis said.

Rating agency Fitch on Tuesday slashed India’s growth forecast for the next fiscal to 8.5% from 10.3%, citing soaring energy prices and rising inflation on account of the Russia-Ukraine war.

Consumer prices rose at 6.07% in February this year breaching the central bank’s comfort range of 4-6%. This was the highest in eight months.

“Going forward we will ensure that there is abundant liquidity in the market for the credit system to be active, for the credit system to function normally,” Shaktikanta Das said two days ago at a conference.

The RBI has maintained an ‘accommodative’ stance.

The developments which have been taking place on the war front which has manifested in high inflation has seen bond yields increase across the world.

Back home it has not been the same and yields have tended to be by and large stable.

“The reason is that the MPC/RBI has reiterated that growth is a major concern and that there will be an accommodative stance for the next year,” Sabnavis said.

However, market dealers are apprehensive of how long this stance will be maintained. With consumer price inflation crossing RBI’s upper tolerance limit a call has to be taken.

Government borrowing for next year will also begin from April onwards, a key event the local debt market is waiting for. Dealers are not seen taking any new bets.

Despite global headwinds, foreign portfolio investors have not dumped local debt securities compared to equities.

They sold a net of about $800 million in bonds against a net of $14.5 billion in equities.



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