Bond Market Watchers Expect RBI To Step In As Yields Spike
The spread between the 10-year yield and the repo rate has widened to its highest in over two years, suggesting tighter financial conditions even as future tariff-related growth risks exist.
India’s central bank may buy bonds in the secondary market or reject bids at auctions to arrest the biggest bond selloff in more than three years, according to analysts.
The Reserve Bank of India “should be somewhat worried about the pace of rise in yields,” ICICI Securities Primary Dealership economists led by A. Prasanna wrote in a note. It “can give soft signals like statements or marginal screen purchases to ensure smooth functioning of the bond market,” he said, referring to open market operations by the central bank in the secondary market.
Yields on India’s benchmark 10-year bond rose about 20 basis points in August, as worries over government finances grew after Prime Minister Narendra Modi announced a cut in consumption taxes. Fading hopes of an interest-rate cut after better-than-expected economic growth data have also contributed to the selloff.
Nomura Holdings Inc cited government conducting buybacks, and RBI allowing the call rate to drift lower, helping improve the carry of owning bonds, as other options. “Support could come from an adjustment to the supply. Near term, bids could be rejected at the bond auctions,” analyst Nathan Sribalasundaram wrote in a note.
A spokesperson for the RBI didn’t immediately respond to an email seeking comments.
Data released Friday showed the pressure on government’s finances is rising — fiscal deficit in four months through July was nearly 30% of the full-year budget estimate, significantly higher than 17% in the year-ago period.
The impact on borrowing costs is reflecting in the corporate debt market too, with Bajaj Finance Ltd. and Housing and Urban Development Corp. among the companies shelving planned bond issuances, according to local media reports.
The spread between the 10-year yield and the repo rate has widened to its highest in over two years, suggesting tighter financial conditions even as future tariff-related growth risks exist, according to Australia and New Zealand Banking Group.
“Even if the RBI cuts rates once more, that seems to have been priced in, so spreads may not compress meaningfully,” said Dhiraj Nim, India economist at ANZ. “In that backdrop, the RBI would have to step into the market and a direct OMO can be an option. The timing of that, however, is hard to predict.”
