What Else do You Need? RBI has Given Everything
The shift in RBI’s liquidity management policy lifts mood in dealing rooms
Mumbai: Tuesdaywasn’tsobadfor bond traders – they had reasons to cheer after months of despondency, doubt and anxiety. The Reserve Bankof India’sbi-monthlypolicyon Tuesday offered them something to look forward to and they suddenly weren’t complaining against the central bank, or its gover nor, Raghuram Rajan.
It wasn’t the quarter percentage point rate cut that lifted their spirits, but a shift in liquidity management policy that struck a chord in dealing rooms. RBI’s liquidity management system would in fact ensure that there are faster results which would lead bond yields to dip, and push prices up. “With more open market opera- tions in the offing, we now see more opportunity for trading gains,” said DevendraDash,aseniorbonddealer at DCB Bank. “Liquidity measures have definitely buoyed bond markets more than a 25 bps rate cut.”
In fact, bond dealers had anticipated RBI’s latest rate action, but what they didn’t bargain for was such a robust set of l iquidity measures aimed at curbing the possibility of a cash crunch in the system. The central bank has acknowledged liquidity management in two ways: short term, and permanent durable liquidity, in line with broad market thinking. “What else do you need… RBI has given everything. This is Guv Rajan’s master stroke establishing his credibility once again,” said a
head treasurer from a large bank, who till last week was critical of the central bank governor.
Open market operations, under whichRBIbuysorsellsgovernment bonds from/to the secondary market, also drive yields.
Our estimate suggests that RBI will buy at least more than ₹ 1 lakh crore government bonds this year alone. If we take strategic trade positions, it will help us to make money, said a dealer from a large bond house. The benchmark bond yields on Tuesday rose to 7.46%, four basis points higher than previous day’s close. Although it dipped to 7.37% during the day immediately after the RBI policy announcement, it erased gains on investor profit booking. Next few months, the benchmark bond yield is expected to fall in the range of 7.25-7.15% from 7.46% at present.
With more open market operations in the offing, market now sees more opportunity for trading gains