RBI grants licence to Bank of China to set up branch

The RBI has issued a licence to Bank of China to launch operations in India, official sources said on Wednesday. Prime Minister Narendra Modi had made a commitment to Chinese President Xi Jinping to allow Bank of China to set up branches in India when they had met on the sidelines of the SCO summit in Qingdao last month.

Even as the currency market is keeping investors on the edge, the bond market is showing remarkable stability, mirroring US yields and the promise of adequate system liquidity by the Reserve Bank of India (RBI).

The RBI infuses durable system liquidity by purchasing bonds from the secondary market under its open market operations (OMO).

So far this financial year, the central bank has conducted two OMO purchases of ~100 billion each. The market is assured if needed, the central bank would do more.

Various estimates suggest the market is penciling in OMOs of at least ~500 billion in this financial year, with some analysts expecting OMOs of as high as ~1 trillion.

Bond yields moved up from 6.5 per cent level last August to nearly about 8 per cent by May. The yields would have moved even higher, but for OMOs conducted in May and June.

Bank of America Merrill Lynch economist Indranil Sen Gupta expects the central bank to go ahead and announce an OMO calendar to cool off bond market sentiment. Sen Gupta expects the RBI to inject liquidity through $50+ billion of OMOs and buybacks of government securities.

“Although the RBI is delaying OMO purchases on seasonal liquidity, spreads are rising in other bond markets,” Sen Gupta said in a report.

However, the rise in yields is not something that is at an alarming level, said Taimur Baig, chief economist at DBS Group in an interview with Business Standard.

“Generally speaking, if the economy is growing at 7-8 per cent, inflation is five-ish, I think the RBI will be comfortable seeing 10-year bond yields above 8 per cent, especially at a time of twin deficits. I think RBI is going to fight it through major open market operations,” Baig said.

One major reason for the stability of the bond has been the relative stability of the US bond yields. The 10-year bond yields rose to about 3.14 per cent, but has now settled at around 2.85 per cent. The Indian bonds follow US bonds very closely.

“The US bond yields cooling down is a major leg up, but RBI’s stance being at neutral, is a comfort factor for the bond dealers.

The market was expecting a hike, but the neutral stance indicates the RBI is not overtly hawkish,” said Soumyajit Niyogi, associate director, India Ratings and Research.

The 10-year bond yields closed at 7.85 per cent, from its previous close of 7.88 per cent.

However, even as yields show some sign of stability, the foreign portfolio investors have been bearish on the bonds. So far this year, the FPIs have liquidated $6.13 billion equivalent of rupees from the local debt market.

To stop the outflow, the central bank has taken a number of steps, including allowing FPIs to invest in any maturity they prefer, including short-term treasury bonds.