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Will RBI measures trigger rally in bonds?

Mumbai: The Reserve Bank of India (RBI) announced fresh liquidity measures and a relaxation in mark-to-market rules to help calm investor nerves as a sudden spike in yields hit bond markets. It raised the amount of bonds that could be held without providing for losses by 2.5 percentage points, raising the demand for government bonds by as much as Rs 3 lakh crore. The central bank’s latest measures could trigger a rally in the bond market, benefitting central and state governments that can borrow at lower costs.

The central bank raised the limit on bonds held-to-maturity (HTM) to 22% from 19.5% of total deposits, known as Net Demand and Time Liabilities (NDTL). This means banks will have room to buy more bonds without bothering about short-term fluctuations in yields.

“In support of the accommodative stance of monetary policy, the RBI is committed to ensuring comfortable liquidity and financing conditions in the economy,” the central bank said in a release on Monday.

The central bank also announced it would buy Rs 20,000 crore of long-duration sovereign bonds and sell a similar quantum of short-term bonds, repeating the ‘twist’ measure announced and partly conducted last week. This will take place in two tranches on September 10 and 17.

“The RBI remains committed to conduct further such operations as warranted by market conditions,” the central bank said.

The benchmark bond yield rose over 30 basis points, pulling prices down. The gauge fell by three basis points Monday to close at 6.12%, although the central bank announcement came after truncated market hours. The bond market close has been advanced to 2 pm from 5 pm in the wake of coronavirus-induced lockdowns. A basis point is 0.01 percentage point.

“The banking system has abundant surplus liquidity without any demand for credit,” said Soumyajit Niyogi, associate director at India Ratings and Research. “The latest rise in HTM limit will open up space for banks parking money in government bonds, which in turn should check funding costs for both central and state governments. The reversing LTRO (Long-Term Repo Operation) option should ease interest rate uncertainties.”

The RBI will conduct term repo operations for an aggregate Rs 1 lakh crore
at a floating rate in the middle of September to assuage pressures on the market on account of advance tax outflows.

Banks can use the window to reduce interest costs as they availed of money at 5.15% via the LTRO, a dedicated RBI liquidity window introduced in the first few months of the calendar year. The banks may reduce their interest liability by returning funds taken at the 5.15% repo rate prevailing at that time and swapping it for money at the current repo rate of 4%, the central bank said.


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