RBI sends signal to traders that bond yields may head higher

Bloomberg

Traders of India’s bonds were unnerved after the central bank cued that rising yields are here to stay by offering surprisingly high borrowing costs at a debt sale.
The Reserve Bank of India (RBI) sold a 30-year bond at a cutoff yield of 6.75%, versus the 6.65% estimated in a Bloomberg survey. The central bank, which acts on behalf of the government for debt sales, also sold another security at a higher yield to raise $267 million more than planned.
“The RBI’s and bond market’s perceptions of higher yields may differ,” said Arvind Chari, head of fixed income at Quantum Advisors Pvt. “If the central bank doesn’t offer support in the form of purchases in the next two to three weeks, it may be guiding yields higher.”
The debt sale followed the publication of the latest RBI minutes, which showed that its rate-setting panel has turned less dovish with higher inflation. Traders are now bracing for a further steepening of the yield curve, while holding out hope that the central bank will introduce other measures to ease pressure on the bond market.
Borrowing costs have already been advancing, with the new benchmark 10-year bond yield jumping more than 30 basis points in past three weeks. The RBI’s debt purchases in the market tapered in recent weeks. The central bank may be choosing to stay away to make sovereign debt more attractive to investors amid falling real rates.
“The market will hope that the auction results have finally met the threshold for the RBI to signal something,” said Suyash Choudhary, head of fixed income at IDFC Asset Management in Mumbai.

“Loan restructuring plan to help revive economy”
New measures to allow Indian lenders to restructure loans will provide a “durable” resolution for cash-strapped businesses and help revive the economy, according to central bank’s chief.
“On one hand health of banks is very important and on the other hand businesses are under a lot of stress due to Covid,” Reserve Bank of India Governor Shaktikanta Das Das said in an interview with CNBC-Awaaz.
The plan has replaced a blanket loan moratorium that’s due to expire this month, he said. Das said the moratorium was a “temporary solution” for lockdown and not a permanent fix.
Indian authorities are looking to support an economy that’s been hit hard by the coronavirus, while ensuring the stability of a financial sector where bad-debt is set to swell to a two-decade high. Banks are struggling to accelerate credit growth to revive the economy, which is set for its first annual contraction in more than four decades. Lenders are also dealing with a pile of bad debt that was high even before the pandemic.
“We are trying to ensure that such businesses can get some regulatory help via banks on the loans that they have taken,” Das said. “That will help the businesses to revive, jobs will be saved and in turn will help in economic revival.”
Addressing concerns that there could be a spike in bad loans once the six-month loan repayment freeze ends on August 31, Das said banks will be able to extend or provide a new moratorium to borrowers under the new plan.

Details on the eligibility criteria for companies will be announced by Sept. 6 after an expert panel considers the financial parameters and banks will be able to internally identify the accounts they would like to restructure, Das said.
“We will win this war against pandemic,” he said. “I don’t know how much time it will take but we will definitely win this war against Covid.”