With Central and state governments and corporates set to tap the bond market for funds in a big way, the Reserve Bank of India (RBI) on Friday announced a series of measures to bring more liquidity and keep bond yields under control. The benchmark 10-year bond yield fell as much as 8 basis points to 5.93 per cent after the RBI announcement.
The RBI has introduced on-tap targeted long-term repo operations (TLTRO) of Rs 1,00,000 crore for providing additional liquidity to sectors with backward and forward linkages to growth, extended SLR holding limits under HTM (held to maturity) till March 2022 and announced open market operations (OMOs) for state development loans (SDLs) for the first time to compress the rising spreads.
It has decided to conduct on-tap TLTRO with tenors of up to three years for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021, with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme. Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers and NCDs issued by entities in specific sectors.
The RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations. In response to feedback from market participants, the size of these auctions will be increased to Rs 20,000 crore from Rs 10,000 crore, the RBI said.
It said banks which had availed of funds earlier under targeted long-term repo operations (TLTRO and TLTRO 2.0) will be given the option of reversing these transactions before maturity.
For the first time, the RBI has decided to conduct open market operations in SDLs as a special case during the current financial year. This is being done to impart liquidity to SDLs and thereby facilitate efficient pricing. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities, the RBI said. “We look forward to cooperative solutions for the borrowing programme for the second half of the year. It is said that it takes at least two views to make a market, but these views can be competitive without being combative,” RBI Governor Shaktikanta Das said.
“We expect bond yields to soften post this announcement and prices to rally across gilts, SDLs and corporate bonds. Money market yields are already trading at low levels in the backdrop of ample banking system liquidity and past rate cuts,” said Bekxy Kuriakose, head–fixed Income, Principal Asset Management.
Krishnan Sitaraman, senior director, CRISIL Ratings, said, “The Rs 1 lakh crore TLTRO window should enhance funding availability for companies as economic activity picks up in the second half of the year. The last TLTRO scheme had enabled BBB and A rated entities to access funding through bonds, which was otherwise challenging for them.
According to Abheek Barua, Chief Economist, HDFC Bank, the highlight of the policy was the RBI’s signal that it would “do whatever it takes” (a phrase immortalized by former European Central Bank Governor Mario Draghi) to align risk-free government bond yields with the fundamentals of the economy. “Were these measures to succeed, as we expect them to, the upward pressure on yields that have built up on the back of heavy anticipated supply of central and state government bonds, is likely to moderate,” Barua said.
It remains to be seen if the commitment to facilitate state and central government borrowing, as well as the explicit signals aimed at softening yields, are 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 FY2021, said Aditi Nayar, principal economist, ICRA Ltd.
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