Will RBI measures trigger a rally in bonds? – Economic time

Mumbai: Reserve Bank of India (RBI) announced new liquidity measures and relaxation of mark-to-market rules to help calm investors’ nerves as sudden spike in yields hits bond markets. He increased the amount of bonds that could be held without forecasting losses by 2.5 percentage points, increasing demand for government bonds by nearly 3 lakh crore. The latest central bank measures could trigger a bond market recovery, benefiting central governments and states that can borrow cheaply.

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

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

The central bank also announced that it would buy Rs 20,000 crore of long-term sovereign bonds and sell a similar amount of short-term bonds, repeating the “twist” measure announced and partially carried out last week. This will take place in two installments on September 10 and 17.

“The RBI remains committed to conducting further operations as market conditions warrant,” the central bank said.

The yield on benchmark bonds rose more than 30 basis points, pushing prices down. The gauge fell three basis points on Monday to close at 6.12%, although the central bank’s announcement came after truncated market hours. The bond market close was brought forward to 2 p.m. from 5 p.m. following lockdowns induced by the coronavirus. One basis point is equal to 0.01 percentage point.

“The banking system has a plentiful excess of liquidity with no demand for credit,” said Soumyajit Niyogi, associate director of India Ratings and Research. “The latest increase in the HTM limit will open up a space for banks putting money into government bonds, which in turn would have to check the funding costs of central and state governments. The LTRO (Long-Term Repo Operation) reversal option should ease interest rate uncertainties. ”

RBI to conduct forward repo transactions for aggregate Rs 1 lakh crore
at a floating rate in mid-September to ease the pressures on the market due to the anticipated tax outflows.

Banks can use this window to reduce interest charges as they took advantage of 5.15% cash through LTRO, a dedicated RBI liquidity window introduced in the first few months of the calendar year. Banks can reduce their interest debt by returning funds withdrawn at the 5.15% repo rate in effect at that time and swapping them for cash at the current 4% repo rate, the bank said. central.

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