RBI move to cut reverse repurchase rate fuels rally in short-term bonds

India’s bond markets, reeling from increased supply from the government’s record-borrowing plans, won a reprieve from the central bank.

The Reserve Bank of India (RBI) cut the reverse repurchase rate to free up more cash for lending, fueling a rally in short-end bonds even as it dashed market hopes of massive debt purchases from the open market.

The yield on the 6.18 per cent 2024 bond fell 26 basis points to 5.48 per cent. The benchmark 10-year yield, in comparison, slid nine basis points to 6.35 per cent after dropping as much as 15 basis points before the measures were announced.

Friday’s measures, taken as a whole, weren’t as strong as some debt market participants had expected. Traders were hoping for more substantive steps like a calendar for debt purchases, with some even calling for dramatic moves like the RBI buying government debt directly.

“The market is disappointed as there weren’t any concrete measures for the government bond market,” said Lakshmi Iyer, chief investment officer debt at Kotak Mahindra Asset Management.

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“In the absence of any indication of support via open-market bond purchases, it would be a challenge to meet such a huge supply of government bonds. Longer yields may remain under pressure.”

With PM Narendra Modi’s government embarking on a record-borrowing spree, the bond market has slumped in the past two weeks. Primary dealers for sovereign debt auctions demanded higher underwriting fees for a second week in a row, underscoring market concerns over an oversupply.

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Following the announcements, authorities did manage to sell Rs 200 billion of debt as planned.

Among other steps, the RBI said it would provide Rs 500 of cheap money to banks to buy bonds of shadow lenders, and enhanced a ways-and-means advance facility available to authorities.

India’s predicament is mirrored in other Asian markets, as governments compete for funding to combat a coronavirus-driven slowdown. While central banks in Australia and New Zealand have embarked on massive bond purchases, capping borrowing costs, the RBI has largely refrained from such measures.

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The government has already unveiled a $2.6 billion fiscal stimulus for the poorer sections and further announcements are imminent.

“The deficit financing plan ahead is quite murky,” said Suyash Choudhary, head of fixed income at IDFC Asset Management in Mumbai. “To be fair to the RBI, it may be awaiting the actual announcement of borrowing before unveiling the absorption plan.”