India’s sovereign bonds rally on signs of purchases by RBI

Bloomberg

Sovereign bonds in India rallied after data showed the central bank bought debt earlier in the month, fuelling speculation that it will do more to support a market worried about record government borrowings.
The yield on the benchmark 10-year debt fell 14 basis points to 6.21%, its biggest drop in a month. The 6.18% 2024 debt fell 21 basis points. The Reserve Bank of India bought 146.6 billion rupees of bonds over three days for the week ended April 10, according to data released after market hours on Friday.
Traders also pointed to a report by Cogencis, which said the RBI had asked primary dealers to buy bonds at the government auction for reselling to the central bank. Investors have been calling on the RBI to do more after outflows increased as India kicked off a 7.8 trillion rupee borrowing plan.
“The RBI is clearly doing ‘what it takes’ to support the markets at a time of revenue and spending mismatches,” said Manish Wadhawan, founder and managing partner at Serenity Macro Partners.
RBI Governor Shaktikanta Das unveiled a slew of new measures on Friday to help banks and companies cope with the economic strain from the coroanvirus outbreak. He didn’t announce bond purchase measures, but cut the reverse repurchase rate to direct funds towards lending.
There has been growing market chatter recently over possible RBI intervention. At the auctions for 91- and 364-day Treasury bills last week, two bids each bought up the notes on sale. A single bid absorbed all of the 182-day bill sale.
Data later showed that purchasers for those bills came from a category called “Others,” which included the central bank. In total, buyers in the category bought 156 billion rupees of bills last Wednesday.
“The fine line between primary market and secondary market participation is an important distinction, at least in theory,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “The scale of purchases, though could make that a distinction without a difference and EM central banks have a much narrower berth when it comes to such margins of error.”
Under a law which came into effect in 2006, the central bank is barred from buying government debt in primary auctions. An escape clause allows the RBI to do so under exceptional circumstances.
Prime Minister Narendra Modi’s government is coming under increasing fiscal strain as it attempts to cushion the economic impact of pandemic with stimulus measures.
It has ramped up short-term borrowings through Treasury bills to 4.5 trillion rupees for the rest of April-to-June period, up from 3 trillion rupees announced earlier.
“The increase in issuance, particularly through 364-day T-bills, shifts some of the burden of additional market borrowing for the year to the shorter end of the curve at a time of surplus liquidity and lower short-term rates supported by RBI easing,” Teresa John, an economist at Nirmal Bang Equities wrote in a note on Monday.
Other central banks in Asia Pacific have also taken unprecedented steps. Australia and New Zealand have embarked on quantitative easing programs, while Bank Indonesia said it may start buying sovereign bonds directly at government auctions as early as this week.