Let us talk about RBI’s Rs 1-trillion bond buying programme. Many are comparing it to the QE programme. How well do you think it will do its job in capping the spike in yields that we have seen in the last couple of months?
The announcement made by RBI with respect to GSAP and the Gsec acquisition programme is actually a master stroke in the sense that markets have been constantly in a state of anxiety that the only way that yields can move is northwards. Nobody is really interested in adding on because the uncertainty element was killing. So, the GSAP announcements have curbed a great deal of uncertainties. Effectively it means that the certainty quotients have upped significantly. Earlier the bond markets had OMOs or open market bond purchase or Operation Twist. But the timing was anybody’s guess. Now with a set calendar, that uncertainty is gone and we are seeing the bond yields continuing to party.
The government has quite a large borrowing calendar this year. How do you see the yield curve developing there?
So this announcement which is an add on to the current OMO/Operation Twist that they are doing, seems to be taking a good amount of the government of India’s bond supply. For the first quarter for instance, the total supply is close to about Rs 5,75,000 crore including the state loan supply of which 1 lakh is already available for RBI to take to GSAP. This is over and above OMOs. This is 1.0 version which means two versions are going to come. The absorption of supply has much more clarity from a demand lever perspective and as the months and quarters go by, we get more clarity on how much more quantum is required over and above the current levels. It is definitely good news from a bond yields’ perspective. One can expect bond yields to trade range bound. There are no material surprises on the upside and no significant movements on the downside as well.
The way you track bonds, you have to track macros pretty closely. What do you think is happening on the yield front? Do you think that eventually inflation or growth led inflation will come back?
It is difficult to envisage that there is only growth and no inflation but somehow right now, what is happening is that the bond markets globally are constantly crying wolf and the wolf is nowhere to be seen. So here is a case of a constant anxiety-led uptick in bond yields across the globe. Quite a few countries have actually moved into the positive territory, But there is also a scenario, especially in India, when the virus seems to be gaining upper hand over the vaccine. One has to be mindful of the ecosystem and cannot completely ignore the inflation factors.
What RBI did yesterday was to offer its balance sheet to ensure that the borrowing programme is non-disruptive and at the same time, it has ensured that it does not lose its balance because they have upped the inflation guidance marginally. It has been a tight rope walk and one cannot completely ignore the trend. But you can certainly reduce the impact.
