Worst rout in seven years may end for Indian bonds amid RBI buying

By: | Published: November 6, 2018 1:25 AM

With India’s central bank emerging as the biggest buyer of government debt, some traders are calling time on a rout that’s lasted more than a year and sent benchmark yields soaring to a four-year high.

The liquidity deficit, which stood at Rs 1 trillion at the end of October, fueled a spat between the government and the RBI.

With India’s central bank emerging as the biggest buyer of government debt, some traders are calling time on a rout that’s lasted more than a year and sent benchmark yields soaring to a four-year high.

The Reserve Bank of India (RBI) bought Rs 860 billion ($11.8 billion) of bonds between May and October, and plans to inject Rs 400 billion this month to replenish liquidity drained by its currency defense and a seasonal cash crunch. The purchases will help shrink the supply of paper for the fiscal second-half by 80% from a year earlier, according to estimates by Nomura Holdings.

“It’s unlikely that sovereign yield could flare up again,” said Sandeep Bagla, associate director at Trust Capital Services in Mumbai. “The RBI is emerging as the largest buyer of government bonds as it attempts to combat a rapidly tightening liquidity scenario.” The purchases have coincided with a rapid cooling in oil prices that helped drive the yearlong selloff in bonds, the worst run of quarterly losses since 2011. The cash crunch in the banking system may prompt the RBI to extend its support beyond November, according to ICICI Securities Primary Dealership.

“In a perverse way, the liquidity deficit is helping bonds rally,” said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Bank in Mumbai. “Demand-supply is stacking up better post OMO from RBI.”

The liquidity deficit, which stood at Rs 1 trillion at the end of October, fueled a spat between the government and the RBI.

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