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Government securities rallied on Wednesday after the Reserve Bank of India (RBI) Governor Shaktikanta Das announced that the central bank would be buying government bonds from the secondary market to enable a stable and orderly evolution of the yield curve amid comfortable liquidity conditions.
The RBI Governor said the central bank will conduct a secondary market G-Sec acquisition programme or G-SAP 1.0, under which it will commit upfront to a specific amount of open market purchases of government securities. Following the announcement, the benchmark yield closed 4 basis points down on Wednesdayat 6.08 per cent – its lowest level since mid-February.
For the first quarter of FY22, the RBI will conduct a G-SAP of ₹1-lakh crore. Experts indicated that the unanticipated move has been taken positively by the market.
According to bond market participants, the primary concern of the market was the government’s huge borrowing programme and the subsequent supply of high-quality paper that could have possibly pushed the yields higher, going forward. With the central bank explicitly stating a bond-buying programme, worries over the impact of any additional borrowing by the government seem to have been quelled for good, say experts. Bond dealers believe the benchmark yield could remain in the range of 5.95-6.25 per cent in the near term.
The first purchase of government securities for an aggregate amount of ₹25,000 crore under G-SAP 1.0 will be conducted on April 15, 2021, said the RBI.
Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, said the decision to announce longer term variable reverse repo and an upfront QE style market intervention needs to be seen in this context. This should enable a gradual normalisation of money market rates as well as a reasonable support to ensure a smooth borrowing program,” said Radhakrishnan.
Orderly evolution
RBI Governor Shaktikanta Das stated during the monetary policy meet that the central bank’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof. “Our objective is to eschew volatility in the G-sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors,” said Governor Das.
Indeed, keeping the yields from hardening serves two important purposes: one, it helps in bringing down government borrowing costs from the bond market. Two, it also keeps corporate and State-borrowing costs under check even as these entities depend heavily on the bond market for their funding needs.
Manish Wadhawan, Managing Partner at Serenity Macro Partners, said the central bank has been buying bonds from the market over the past many years, but that has been on an ad-hoc basis. “A formalisation of this process has, therefore, been taken positively by the market which has led to the fall in yields,” said Wadhawan.