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The slew of liquidity measures announced by the RBI in its recent October policy, it appears, are already easing bond market concerns.
Not only has the 10-year government bond yield moved lower notably to 5.89 per cent levels, but the RBI’s ₹20,000-crore outright OMO (open market operations) purchase auction also sailed through, after the last auction had failed.
The RBI received bids to the tune of ₹1.13-lakh crore against the notified OMO purchase of ₹20,000 crore on October 15. It accepted ₹6,600 crore amount for the six-year bond at a cut-off yield of 5.56 per cent, ₹5,177 crore for eight-year bond at 5.89 per cent, ₹3,475 crore for the 10-year bond at 5.86 per cent and ₹4,748 crore for 13-year bond at 6.3 per cent.
The cut-off for the 10-year bond yield coming in lower than 6 per cent levels at 5.86 per cent, is indicative of the comfort that bond market is drawing from the RBI’s recent policy moves.
Three key measures
Assuring ample liquidity support, the RBI had announced three key measures in its October policy. One, it decided to conduct on tap TLTRO with tenors of up to three years for a total amount of up to ₹1,00,000 crore.
Two, it extended the earlier dispensation of enhanced HTM (held-to-maturity) limits up to March 31, 2022 (by 2.5 per cent) for banks with respect to SLR securities acquired between September 1, 2020 and March 31, 2021. This opens up additional buying window for banks, easing concerns of oversupply of bonds.
Three, the RBI announced outright OMOs (purchase of government bonds) to the tune of ₹20,000 crore per auction. The RBI had also announced OMOs for the first time for State Developments Loans (SDLs) as a special case.
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Apart from providing ample liquidity and credit growth enablers, the RBI has assured industry of support when neededAll these measures have soothed bond market concerns over the rise in Centre and State borrowings in the second half of the fiscal and cooled off yields.
Facilitating borrowings
The latest OMO purchase auction of central government bonds indicates that the remaining borrowing programme could also sail through at below 6 per cent levels.
On Thursday, the RBI announced the borrowing calendar for the second half of this fiscal (October 19, 2020 to March 31, 2021) to the tune of ₹4.88-lakh crore, to operationalise the special window to States for meeting the GST compensation Cess shortfall of` ₹1.1 lakh crore. The additional amount for meeting the GST compensation shortfall will be raised at ₹55,000 crore each via 3- and 5-year tenure bonds.
Past concerns eased
The RBI’s first outright OMO purchase for the fiscal of ₹10,000 crore, conducted on September 24, had failed, with the RBI rejecting all the bids amounting to ₹ 66,473 crore.
Concerns over the rising fiscal deficit, had led to market participants offering low prices (higher yields) which was not acceptable to the central bank. Given that the RBI has been keen on nudging the yields lower, it had rejected all the bids.
The central bank’s policy moves appear to have ironed out the differences between market expectations and the RBI for now.
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