4 hrs ago
RBI’s ₹1 Lakh Crore Bond Sales Hit Short-Term Securities
The RBI plans to sell many government bonds to remove extra money from banks.
The sales will happen in three parts starting September 17.
Bonds that mature in three to six years are being affected the most because many of the bonds being sold have those maturities.
This has pushed their yields higher and prices lower.
The government is already planning to borrow a large amount of money in the coming six months.
Inflation and higher oil prices are creating additional concerns for India’s economy.
Some analysts now expect the RBI to raise interest rates sooner.
The rupee also weakened against the dollar, and traders said the RBI sold dollars to support it.
The Reserve Bank of India will sell ₹1 lakh crore of bonds in three tranches beginning September 17 to absorb excess banking-system liquidity.
Bonds maturing in three to six years have faced the sharpest pressure because much of the additional supply is concentrated in that segment.
The bond market is also managing nearly ₹8 lakh crore of federal borrowing planned over the next six months, alongside state borrowing.
Rising August inflation, higher crude oil prices and global bond-market pressure have increased expectations of tighter RBI policy.
The rupee fell 0.4% to 95.96 per dollar, while traders said the RBI intervened through dollar sales.
- Who
- The Reserve Bank of India, bond investors, the central government and state governments are involved.
- What
- The RBI will sell ₹1 lakh crore of government bonds in three tranches to absorb excess liquidity, putting particular pressure on three-to-six-year securities.
- Where
- India’s government bond market and foreign-exchange market.
- When
- The bond sales are scheduled to begin September 17; the market is also considering borrowing planned over the next six months.
- Why
- The RBI said it wants to absorb excess banking-system liquidity created by recent measures that attracted foreign capital.
RBI Liquidity Management
Bond-Market Concerns
Purpose of the bond sales
RBI Liquidity Management
The RBI says the sales are intended to absorb excess liquidity that accumulated in the banking system after measures attracted foreign capital.
Bond-Market Concerns
Investors face additional government-securities supply, which can keep yields under pressure, especially for three-to-six-year bonds.
Interest-rate outlook
RBI Liquidity Management
Tighter liquidity could support the RBI’s response to rising inflation and increasing crude-oil-related risks.
Bond-Market Concerns
Analysts cited in the report expect borrowing costs could rise, with some bringing forward expectations of an RBI rate hike to October.
Short-term bond performance
RBI Liquidity Management
The RBI has a sizeable stock of government securities available for sale, giving it room to manage liquidity.
Bond-Market Concerns
The five-year segment has been described as the main casualty because it was richly valued and is receiving concentrated additional supply.
Key facts
- Planned bond sales
- ₹1 lakh crore
- Sales schedule
- Three tranches beginning September 17
- Most affected maturities
- Three to six years
- Federal borrowing ahead
- Nearly ₹8 lakh crore over the next six months
- RBI government-securities holdings
- Around ₹23 lakh crore, or about 18% of outstanding central government securities
- Rupee movement
- Down 0.4% to 95.96 per dollar
- Inflation target range
- 2%-6%, with August inflation moving closer to the upper end
Quotes
VRC Reddy
Head of treasury at Karur Vysya Bank
“The decision is the most stringent action the RBI has taken so far and the logical casualty has been the five-year segment, which was richly valued”
businesstoday.in
Sources
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