RBI announces measures to cool yields, boost liquidity

Heeding to banks’ longpending wish- list, the Reserve Bank of India ( RBI) on Monday allowed banks to park new government bonds acquisition made from September 1, 2020 upto March 31, 2021 under the ‘ held to maturity’ ( HTM) category up to an overall limit of 22 per cent of their deposits against the existing limit of 19.5 per cent, thereby allowing an additional purchase capacity of approximately Rs 3.6 lakh crore for banks without worrying about fluctuation risks over this period.

In addition, the RBI also announced a slew of measures to cool bond yields and maintain market stability at a time when more than 50 per cent of the Rs 20- lakh crore plus ( Centre and states combined) borrowing programme will be coming up.

Among the other measures, the RBI also announced two more tranches of special open market bond operations, or ‘ Operation Twist,’ and additional term repo operations of Rs 1 lakh crore at a floating rate basis. The RBI also reiterated that it “remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of Covid- 19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.”

The yields on government bonds have risen in the last one week on two concerns— the RBI MPC minutes released last week while did not say anything new, yet led to consternation on the future course of inflation.

Secondly, concerns on fiscal deficit and future borrowing programme of the government impacted sentiment as it is assumed that there would be a lot of government paper coming into the market. The GST debate has only heightened such expectations. As a result, the 10- year government bond rate rose up to 6.15 per cent.

The 5.79% bond closed at 6.08 per cent on Monday while the 5.77 per cent bond at 6.12 per cent.

Suyash Choudhary, head fixed income at IDFC AMC said, “It is also true that more than 50 per cent of the Rs 20 lakh crore plus ( Centre and states combined) borrowing programme is still ahead of us. To that extent one can argue that the announcements today were a “must have” if markets were to continue to behave in an orderly fashion... reinstatement of orderly functioning now allows participants to start deploying risk capital with more confidence to take advantage of what are quite attractive valuations.”