RBI holds rein on bond rates, rupee at six-month high

Strategy may be here to stay in the interim, say experts

The Reserve Bank of India (RBI) on Friday sold very little of the benchmark 10-year bond at the rates asked for, making it clear that it would not let market rates rise beyond its comfort zone.

At the same time, the central bank seems to have briefly withdrawn from intervening in the spot currency markets, letting the rupee appreciate to a nearly six-month high, even as it continued with its forwards markets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 rates without touching policy rates, which remain in “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.

Bond

Friday’s bond auction baffled market dealers. Of the ~18,000-crore benchmark 10-year bond on offer, the RBI refused to sell ~17,983.75 crore. Of the competitive bids placed by the market participants, the RBI accepted ~4 crore, while another ~12.26 crore was sold to firms, provident funds, trusts, and retail investors who go for non-competitive bidding.

The underwriters to the bonds bought the rest. This is also called devolvement in market parlance. The 10-year bond yield closed at 6.14 per cent, almost the same as 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 the RBI may not favour a steeper curve or higher yields,” said R K Gurumurthy, head of treasury, Laxmi Vilas Bank, adding the “total rejection” was a continuance 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 reasonably lower cost and a few of those 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 had never happened. The government’s plan to borrow a record ~12 trillion 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 bond in three months and back-to-back the replacement benchmark gets devolved,” said the dealer.

In Business Standard’s webinar series Unlock BFSI 2.O, RBI Governor Shaktikanta Das defended the central bank’s record in keeping money market rates low. The governor said the 250-basis point cuts in policy rates since February last year 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 stated that being the government’s money manager, the RBI would ensure the borrowing programme sailed 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 the 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. The RBI’S refusal to sell bonds during Friday’s actions was in line with that philosophy.

“So far this year, there have been 17 auctions wherein the amount was greater than the notified sum aggregating ~66,000 crore,” noted Madan Sabnavis, chief economist of CARE Ratings.

Rupee

The rupee rose to nearly a six-month high of 73.40 a dollar.

“The fund flow has been robust in India, leading to the RBI’S foreign exchange reserves swelling. The RBI has briefly stopped buying dollars and let the rupee appreciate, keeping in mind the greenback’s weakness globally. The yuan and yen have risen and the 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 the rupee is not as strong as other currencies. 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 the Fed.

Sooner or later, the RBI will come back to the spot market and intervene. For now, it seems to be focused on the forwards markets. According to Abhishek Goenka, managing director and chief executive officer of IFA Global, nationalised banks are “relentlessly paying forwards on behalf of the RBI. The RBI has been buying dollars in the spot market and sterilising the liquidity infused as a result by swapping the USD forward i.e. doing a sell-buy swap.”