RBI bazooka’s bond market wants more as fiscal stress looms

Bloomberg

The Reserve Bank of India (EBI) delivered an emergency rate cut and pledged $50 billion of liquidity infusion. Now traders want it to join other central banks in unleashing a massive-bond buying program.
Deutsche Bank AG and Barclays Plc are among those who see the RBI taking the next step of buying debt from the market, or the government, a measure the central bank last resorted to in the early 2000s.
Investors are counting on RBI support as fears grow that the government will add to its record borrowings to help fund a 1.7-trillion rupee ($22.6 billion) package countering the coronavirus pandemic. More spending may be needed, Finance Minister Nirmala Sitharaman indicated when she announced the stimulus.
Yields may rebound on India fiscal woes in absence of more RBI support.
“An important dimension that remains is for a very large open-market operation for a bond-buying program,” according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “The format globally now is evolving around monetary expansion supporting fiscal policy and India needs to do the same.”
Bond markets risk seeing a spike in yields in the absence of such support from the RBI, said Choudhary, who predicts that India will further ramp up its fiscal stimulus in the months to come. That’s because a three-week nationwide lockdown is set to inflict more damage on an already-slowing economy.
India’s sovereign curve bull steepened as traders cheered the RBI’s sweeping measures, but a chunk of the initial gains vanished by the close of trading. The benchmark 10-year yield finished 8 basis points lower after having tumbled by as much as 24 basis points to 5.98%, the lowest since 2009.
Yields have fallen from this year’s high as the RBI conducted open-market bond purchases and also injected cheap rupee liquidity. Even so, calls for it to do more are growing as investors await the details of the government’s borrowing plan for the first half of the next fiscal year, which are set to be announced by Monday.
The administration had in February said it plans to borrow an unprecedented 7.8 trillion rupees during the year.
“The central bank will have little choice but to conduct large scale OMO purchases through FY21 and probably even purchase government bonds in the primary market,” Kaushik Das, chief India economist at Deutsche Bank, wrote in a note.