RBI gives a yield signal; again The RBI in consultation with the government has cut the size of this week’s auction by INR 5,000 crores to INR 10,000 crores. It has cut the entire supply of the ‘long’ segment from this auction (defined as 2032 and above). The reason cited is ‘in view of prevailing market conditions’. It may be recalled that the RBI had started doing OMOs in order to cap rise in long term bond yields. However, this exercise was not having the full desired effect since the market was still showing reluctance to bid in auctions despite tendering OMOs at much lower yields to the RBI. As an example, in the last week the RBI accepted 2032 bonds under OMO all the way till 9.08%. However, the equivalent 2032 bond in the auction on the same day was bid at 9.34% by the market. Hence, the objective of capping long bond yields wasn’t getting fully met. Reducing the auction supply itself will have a much greater impact on reducing long bond yields. After this week, and assuming the cancelled amount of INR 5,000 crores for this week doesn’t get adjusted next week, the next auction supply is due in the week of 20th September (also the week of Raghuram Rajan’s maiden RBI policy). Alongside, there is a bond maturity of INR 46,000 crores due today. Hence, the net supply equation is extremely favorable for bonds and may allow market to look through some of the geo-political uncertainties in the near term. On a separate note, the auction reduction reaffirms RBI’s commitment to curb impact of its hiking short term rates at the long end of the curve. It may be recalled that while announcing its last set of measures of allowing HTM transfer for banks and doing OMOs, the central bank had made a strong statement of intent. It had said that while it is important to address risks to macro-economic stability from external sector imbalances, it is also important to ensure that liquidity tightening does not harden long term yields sharply and adversely impact flow of credit to productive sectors. This reaffirmation along with a 4% growth handle precluding any further negative monetary action should provide a lot of comfort to bond investors. We reiterate our view that given the balance of macro-economic risks, the bond curve currently is sufficiently rewarding medium term investors. Given this, we are happy to reiterate our long duration stance.
Posted on: Tue, 03 Sep 2013 06:15:30 +0000
Trending Topics
Recently Viewed Topics
© 2015