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RBI has just twisted yields to stem drop in bond values.

Date: 02-09-2020
Subject: RBI has just twisted yields to stem drop in bond values
Bond yields in India Tuesday plunged the most since the beginning of a stage-gated unlocking of the economy, with the central bank using the so-called Operation Twist to stem the recent decline in bond values. The rupee, too, logged its steepest gains since late March to become the best emerging markets currency in a month.

The benchmark bond closed at 5.94% Tuesday versus 6.12% a day earlier, the steepest single-day decline since May 13. When yields fall price rise.

“The central bank’s demand side measures for the bond market, such as in increase in Held-To-Maturity (HTM) limits and the new Operation Twist calendar, besides the reinforcement of its accommodative stance are positives for bond market inflows,” said B Prasanna, Group Executive, Head – Global Markets & Proprietary Trading Group, ICICI Bank.

In the past two weeks, the Reserve Bank of India (RBI) deployed Operation Twist, a tool first used by the US Federal Reserve to shape skewed yields. In four such instalments, RBI seeks to buy Rs 40,000 crore of long-dated sovereign papers, selling an equivalent amount of shorter duration securities.

Plunging bond yields are expected to bring down funding costs for both the central and state governments.

Meanwhile, the rupee posted its largest single-day gain in five months, signalling the RBI’s intent to let the rupee appreciate and help restrain inflation. With this, the local unit turned out to be the best performing emerging market currency in the past one month outpacing South African Rand and Chinese Renminbi. The rupee rose 2.67% against the dollar in the past one month.

"Global liquidity is driving inflows to India,” said Bhaskar Panda, executive vice president at HDFC Bank. “The central bank's focus on controlling imported inflation and the increase in HTM have triggered a rally in the currency and the sovereign bond market.
Bullishness in both the markets is likely to continue.”

The rupee gained over 1% against the dollar to close at 72.87 Tuesday, its strongest level since March 2, ETIG data showed. This was the largest single-day rise since March 26, when the rupee strengthened 1.25%.

“The appreciation pressure on the rupee remains unabated amid persistent capital flows and the weak dollar globally,” said Prasanna. “The RBI’s admission to the effect that recent INR appreciation has helped in containing imported inflation has further boosted the rupee.”

Foreign portfolio investors pumped in a net of $6.67 billion in August, the highest monthly inflow since March last year, showed data from NSDL.

No public sector bank currency trader was spotted buying dollars either in the spot or forwards or futures markets.

“The central bank, which was earlier seen buying dollars aggressively to shore up record forex reserves, has startled the market with its silence the past few weeks,” said Anindya Banerjee, currency analyst at Kotak Securities.

When the RBI buys dollars to check the rupee’s rise, it increases rupees in the system, which is inflationary.

On Monday, the RBI announced fresh liquidity measures and a relaxation in mark-to-market rules. It raised the amount of bonds that could be held without providing for losses by 2.5 percentage points, creating additional demand for government bonds by up to Rs 3 lakh crore.

“The recent appreciation of the rupee is working toward containing imported inflationary pressures,” RBI said in a statement.


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