The bond market is now keenly awaiting the borrowing programme for the next fiscal which will be one of the key triggers along with the CPI inflation print for coming months.
The bond market seems to have figured out how to erase unpleasant memories from the recent past. This is evident from the paring of recent losses made after the announcement of the huge spike in December CPI inflation at 7.35%. Though bond yields had closed 7 basis points higher on Tuesday, the market has now pared most of the losses in anticipation of the much-awaited OMO announcement under Operation Twist.
The benchmark yield fell seven bps over the last two days to close at 6.60% on Thursday, thereby erasing all the losses made after the announcement of the December inflation print.
As was anticipated by the market, the Reserve Bank of India (RBI) on Thursday evening announced the fourth OMO in the series where it will be looking to simultaneously buy and sell government securities worth `10,000 crore each. This time the central bank will be purchasing securities maturing in 2024 and 2029 while it will be selling securities maturing in 2021.
Siddharth Shah, head of treasury at STCI Primary Dealer, confirmed that the market was looking forward to the OMO announcement and this reflected in the yields.
“The market continues to expect anywhere between five and eight OMO announcements under Operation Twist and we still probably have space for one or two more announcements before the Budget. Indeed, the high CPI does remain on the back of the mind of the market but one has to see that the effect was mainly driven by food inflation. It will probably be ignored by the markets in the near term,” Shah said.
The bond market is now keenly awaiting the borrowing programme for the next fiscal which will be one of the key triggers along with the CPI inflation print for coming months. Some experts are of the view that though the surge in December CPI inflation was led by food prices, inflation is likely to remain sticky in the coming months. The one thing that the market seems to have come to terms with is the fact that a rate cut looks highly unlikely in the upcoming monetary policy in February.
Ananth Narayan, professor-finance at SPJIMR, said RBI is making its intent very clear by bringing in the fourth OMO under Operation Twist — it is working to bring down term premia.
“At least in the short run, it is very difficult for the Indian debt markets to go against a determined RBI, and hence we might see some relief support to bonds. However, the challenges are quite severe in the medium term.While most analysts expect food inflation and hence overall inflation to eventually stabilise at lower levels, I fear that 2020 could be the year where inflation continues to surprise on the upside.
“Secondly, the extent and quality of our fiscal balance is far worse than is acknowledged. GDP growth and credit growth will hopefully recover over the course of 2020. Given all these pressures, interest rates could eventually head higher,” Narayan said.
Foreign portfolio investors (FPIs) have been net sellers of Indian debt so far in 2020. According to Bloomberg data, FPIs have sold $1.16 billion worth of bonds on a net basis this year.