Three months after the Reserve Bank of India (RBI) announced action to alleviate market fears of higher yields and borrowing programs, the yield on 10-year government bonds fell more than 17 basis points.
The 10-year bond yield has declined steeply from 13 May to 5.944 percent, up from the previous figure of 6.117%. In contrast to that, bond yield and prices move.
The holding limit increased from 19.5% to 22% by RBI. It also announced a total of Rs.20,000 crore and Rs.1 trillion repo operations for additional Open Market Operations (OMO).
RBI has ensured its readiness to carry out market operations on a wide range of instruments to ensure the proper functioning of the market. The central bank also ensured that it remained committed to using all the instruments under its control to revive the economy by maintaining comfortable financial conditions, alleviate the impact of Covid-19, and restore economic stability along a path to sustainable growth. It also ensured that the Center and States’ government borrowing program will run non-disruptive for the year 2020-21.
RBI has also permitted to change the Long-Term Repo Operations (LTFR) funds to 5.15% for the sake of cutting the cost of the banks by providing new funds in the Rs.1 trillion repo window at 4%. The RBI has thus made possible the additional 2.5% of deposits for banks as the HTM for the second half of the present financial year (September-March), allowing for a supplementary buy-in capacity of around RS.3.6 lakh crore to banks, with no worry regarding fluctuation. “This is probably the most powerful of the notices made and the one made on the market for a very long period. Because of the heavy borrowing ahead, the current set of triggers should not be expected to be a very large sustainable bond-based rally, although most of the recent aggressive sell-off should reasonably be expected to unwind,” said Suyash Choudhary, head-fixed income, IDFC AMC.
In the first quarter of the fiscal year 2021, the government has announced that the economy contracts were sharper than the rest of the world by 23.9%.
“Current weak economic conditions require a more aggressive fiscal response, but fiscal support has been limited while monetary policy hamstrung because of inflation. Because we expect current inflationary pressures to shrink eventually, we maintain our view that the Reserve Bank of India (RBI), beginning in December, will cumulate 50bp in rate cuts,” said Nomura Research.
“We are also expecting a targeted second round of financial aid in the coming months, although it is still unclear whether the government will provide a broad-based stimulus to demand. Finally, the RBI aims to keep long-term public bond yields low to ensure smooth financing of higher fiscal deficits,” Nomura added.
Meanwhile, the rupee opened 0.57 percent greater to 73.12 a dollar.
