The Reserve Bank of India has net sold bonds worth Rs 1 trillion this financial year, its biggest annual net bond sale in more than a decade, treasury officials told Reuters — and market participants expect the total to double by December.According to RBI data available since FY2015, the previous record was in FY2018, when the central bank net sold Rs 900 billion worth of bonds to deal with the fallout of the government's abrupt demonetisation of 500 and 1,000 rupee notes.
The RBI is withdrawing liquidity from a banking system flush with cash after it allowed lenders to raise dollars through a special window. While the dollar inflow helped protect the nation's foreign exchange reserves and supported the rupee as oil prices rose, it pushed overnight rates below the RBI's policy rate.
New Delhi recently reduced the supply of debt maturing in three and five years for the rest of the fiscal year, which market participants read as a signal of more open-market operations (OMO) to come from the central bank.
Bond desks see little respite. Alok Sharma, head of treasury at ICBC, said he would rather reduce exposure to long-dated bonds than buy more, and expects OMO sales worth another Rs 1 trillion — or a hike in banks' cash reserve ratio. Either, he noted, would be consistent with tighter monetary policy, which the majority of respondents to a Reuters poll expect to see in the form of a policy rate hike next week.
Harsimran Sahni, head of treasury at Anand Rathi Global Finance, expects the RBI to sell an additional Rs 1–1.5 trillion worth of bonds during October–November, factoring in prevailing liquidity conditions.
Any hope of a relief rally in the most actively traded government bonds has disappeared, with investors selling across the yield curve after the government moved to raise borrowing through 15-, 30- and 40-year securities in its second-half borrowing plan. Higher issuance by states could keep the term premium elevated in the near term, said Vikas Garg, head of fixed income at Invesco Mutual Fund, adding that the yield curve should begin flattening at the shorter end as the RBI drains liquidity and recalibrates rates.
A federal finance ministry official, speaking on condition of anonymity, said net borrowing was kept at budgeted levels and that the focus on the long end would help increase the government's weighted average maturity, reducing rollover risk.
Sources: Reuters