India plans more than $41bn in sovereign bond purchases

Bloomberg

The Reserve Bank of India (RBI) will seek to buy more than 3 trillion rupees ($41 billion) of sovereign bonds in the next fiscal year to support the government’s borrowing plans, according to a person with knowledge of the matter.
That will exceed the 3 trillion rupees the RBI is expected to spend for the current year ending March. The intention is to cap the benchmark bond yield under 6%, while narrowing its spread with the repo rate to around 150 basis points, the person said.
This is the first time there’s a clear signal on how much the RBI would spend on bond purchases, as recent market selloffs test its patience. The schism between traders and the central bank had widened when Governor Shaktikanta Das’s assurances on providing liquidity fell short of expectations and led to the partial cancellation of a debt auction.
The RBI announced plans to buy 200 billion rupees of bonds through open-market operations on February 10. Bonds extended gains. The benchmark 10-year yield dropped four basis points to 6.03%. The most-traded 5.77% 2030 bond yield fall six basis points to 6.07%.
Traders had hoped that the RBI will announce a calendar for its bond purchases after Prime Minister Narendra Modi’s administration had announced plans for near-record borrowings. Instead, Das offered measures that included letting retail investors buy sovereign debt while allowing banks the right to hold more bonds without marking to market for a year longer.
An explicit buying calendar could jeopardise the RBI’s foreign-exchange strategy, the person said in explaining the deliberations. The central bank will conduct open-market bond purchases to replenish the system with durable liquidity when the cash reserve ratio is unwound, the person said.
The central bank is confident it can push through the government’s borrowing plans because the target to shrink the budget deficit to 6.8% of GDP in the next fiscal year from the estimated 9.5% this year is contractionary, the person said. That means monetary policy can stay easy, the person said.
The RBI also wants to flatten the yield curve to better reflect inflation expectations, the person said. It will continue with Operation Twists — where the RBI sells short-term debt while buying longer bonds — to achieve this.
So far, the RBI has bought a net 2.5 trillion rupees of debt in the current fiscal year, while the spread between the 10-year bond yield and the repo rate is at more than 200 basis points.
Yields on the benchmark 10-year bond surged 17 basis points last week, its biggest jump since April. The RBI, as the government’s debt manager, now finds itself with the delicate task of rolling back pandemic-era emergency measures and seeing through the government’s borrowing without
roiling the jittery market.
“We believe the tug of war between the RBI’s motivation to support the bond market via OMOs, and fundamentals that call for gradual liquidity normalisation, is set to intensify,” Nomura Holdings Inc. analysts including Sonal Varma wrote in a note.