Such open market operations
(OMO) are now expected to be a common theme for the remainder of this fiscal year, and will continue in the next one as well, bond dealers are now expecting. However, the RBI is still not in a mood to issue an OMO calendar, which was the expectation in some sections of the market. That calendar is unlikely to come; rather, the RBI would want to intervene as and when yields rise, bond dealers are now saying.
One thing is certain now. It is no longer normal market dynamics that are playing out in the market. In this fiscal year, gross borrowing would cross Rs 13 trillion. For the next year, borrowing has been estimated at Rs 12 trillion. It is not the job of bond investors to absorb such demand. The RBI has to chip in to buy a large chunk of it indirectly.
“In these kinds of heavy borrowing, that too for the second year in a row, the pricing power leaves the market and goes to the regulator’s hands. The RBI will now have to draw a ceiling and give strong signals around those levels about its comfort,” said Jayesh Mehta, head of treasury at Bank of America.
That comfort level, clearly, is sub-6 per cent now.
The 10-year bond yield closed at 6.04 per cent on Monday after the OMO announcements by the RBI. It had closed at 6.08 per cent on Friday, but was trading at 6.12 per cent after the monetary policy and before the cancellation of auctions.
The expectation in the market now is that the OMO would be at least Rs 3 trillion for the next fiscal year, just as it had been in this one, irrespective of an OMO calendar. If such heavy OMO support is gained in the next fiscal, the 10-year yields can remain below 6 per cent without much of a problem, say bond dealers.
RBI Governor Shaktikanta Das
sees low yield as a public good, but the organisation seems to be keen on giving signals on the 10-year segment mainly, said senior bond dealers.
“The signal is focused on the 10-year segment, but yields on other segments have remained elevated. If the RBI has to intervene, it must do it across the curve, and not choose a particular tenure,” said a senior bond dealer.
“It is not that the market doesn’t want to cooperate. But the RBI has to show some action first, which it didn’t do in the policy. Once the market is confident that the RBI is there, then the market will settle down and react only to new events,” said another bond dealer.
The market, according to bond dealers, panicked after the Budget as the RBI went silent. Owing to the three-day meetings of the monetary policy committee (MPC), the RBI did not offer any comment about the high borrowing programme in the Budget, or followed up with any action that would assure the nerves of the bond dealers.
Bond dealers say investors are sitting on losses, which they couldn’t afford to widen. “The non-action in the policy really spooked the market. When the RBI says borrowing will be conducted smoothly, what does it mean? Smooth at what level? The market wanted to know,” said one of the bond dealers quoted above.
Bond dealers say the market is trying to gauge the action of the central bank, but those actions should be timely, so that large course correction measures later are obviated.
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