RBI Governor Shaktikanta Das tries tough love with bond market

‘Market participants need to take a broader time perspective, bid with sensitivity to signals from RBI’

With large borrowings to be facilitated for the Centre and the States in the second half of 2020-21, RBI Governor Shaktikanta Das on Friday sought market participants’ cooperation and termed ‘the orderly evolution’ of the yield curve a public good for which they shared responsibility with the central bank.

Mr. Das reiterated an assurance that the additional borrowings required to meet the exigencies of the pandemic, would be completed in a ‘non-disruptive manner without compromising on price and financial stability’. Conceding that the expanded debt supply had imposed pressures on the market, he said the RBI was ready to assuage such pressures and dispel any liquidity concerns in financial markets.

“Market participants, on their part, need to take a broader time perspective and display bidding behaviour that reflects a sensitivity to the signals from the RBI in the conduct of monetary policy and debt management. We look forward to cooperative solutions for the borrowing programme for the second half of the year,” Mr. Das said, in a direct message to bond markets.

“Over the last few weeks, there has been some disconnect between the rationale underlying the RBI’s debt management and monetary operations on the one hand, and expectations in the market, on the other,” he said, likely alluding to some recent auctions of government debt that failed to elicit enthusiasm from investors.

“It is said that it takes at least two views to make a market, but these views can be competitive without being combative,” Mr. Das remarked. The RBI, he said, had decided to double the size of its liquidity-enhancing open market operations (OMOs) to ₹20,000 crore based on market feedback, adding that he expected participants to ‘respond positively’ to the move.

Three immediate measures were announced to ease liquidity — allowing banks to hold more SLR holdings till maturity for securities purchased in the second half of 2020-21, targeted long-term repo operations for up to ₹1 lakh crore with tenors of up to three years, and open market operations in State Development Loans as a ‘special case’. Mr Das said these steps ought to allay market concerns about ‘illiquidity and absorptive capacity for the total government borrowing in the current year.’

Aditi Nayar, principal economist at ICRA Ratings, said it remained to be seen if the RBI’s commitment to facilitate government borrowing, and its explicit signals aimed at softening yields, would prove adequate “to ensure that the bond market shrugs off concerns regarding the fiscal health of the Central and State governments, as well as the large supply of State bonds that is expected in Q4 of 2020-21.”

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