Hours after Das completed his monetary policy exposition, there wasn’t much complaining from any one – even the bond trader who has been playing hide and seek with the central bank for nearly six months.
As the central bank balanced the need to stimulate the economy with extraordinary liquidity and ensure financial stability, investors were getting jittery as to how the investment banker to the government would help his client’s biggest borrowing in history.
Despite the Governor’s repeated assurance that liquidity would be ample, investors were not convinced, especially when some signalling went awry. The central bank stuck to its practice of injecting liquidity through bond purchases known as Open Market Operations at its discretion. Bond traders wouldn’t buy it and drove yields higher.
A bureaucrat turned central banker, Das’ approach has been to dangle the carrot and avoid the stick. He attempted persuasion, cajoling, lecturing over the past few months to tell the markets what he intended to do.
“We look forward to cooperative solutions for the borrowing programme for the second half of the year,’’ Das said in October. “It is said that it takes at least two views to make a market, but these views can be competitive without being combative.’’
But the investors used to blank cheque promises from the likes of the Federal Reserve and the European Central Bank wouldn’t settle for anything less.
They drove the yields higher and higher, more so after the Finance Minister Nirmala Sitharaman on Feb. 1 unveiled a record borrowing for this fiscal.
The benchmark 10- year yield, which traded at 5.93 per cent on an average during April 2020-January 2021, spiked to 6.25 per cent on March 10, 2021 before cooling off. Corporate bond yields surged, too, by nearly 30 basis points. A basis point is 0.01 percentage point.
While the Governor was persuading, the RBI in its latest bulletin blamed the ‘bond market vigilantes’ for potentially derailing the recovery.
“The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav,’’ said the RBI.
For investors, the numbers did not add up. Its bond purchases were not consistent and predictable. Although its liquidity stance remained accommodative, investors were worried that financial stability could take precedence over rates.
These conflicts and concerns led to the Governor showing his hand on Wednesday with the G-Sec acquisition programme or G-SAP on the lines of US Fed’s Large-Scale Asset Purchases L-SAP programme after the implosion of Lehman Brothers.
The quantum of Rs. 1 lakh crores in the fiscal first quarter may be tiny compared to the QEs of advanced economies’ central banks, but still it’s reassuring for investors who were flying blind. The Governor has also assured that it’s not `one-off.’ That it has a tag 1.0, it is logical that 2.0 may well follow.
“While G-SAP quantum has been indicated, we reckon that the buffet of measures leave the room to increase the quantum of cumulative support if required, with the timing of purchases hinging on fiscal, inflation health as well as global influences,’’ said Radhika Rao, economist at DBS Bank.
Probably numbers could work where words didn’t.
