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RBI Bazooka Has Bond Market Wanting More as Fiscal Stress Looms

Traders want RBI to join other central banks in unleashing a massive-bond buying programme.

RBI Bazooka Has Bond Market Wanting More as Fiscal Stress Looms
The portrait of Mahatma Gandhi is displayed on an Indian 2,000 rupee banknote. (Photographer: Brent Lewin/Bloomberg)

(Bloomberg) -- The Reserve Bank of India delivered an emergency rate cut and pledged $50 billion of liquidity infusion on Friday. Now traders want it to join other central banks in unleashing a massive-bond buying program.

Deutsche Bank AG and Barclays Plc are among those who see the RBI taking the next step of buying debt from the market, or the government, a measure the central bank last resorted to in the early 2000s.

Investors are counting on RBI support as fears grow that the government will add to its record borrowings to help fund a 1.7-trillion rupee ($22.6 billion) package countering the coronavirus pandemic. More spending may be needed, Finance Minister Nirmala Sitharaman indicated when she announced the stimulus on Thursday.

RBI Bazooka Has Bond Market Wanting More as Fiscal Stress Looms

“An important dimension that remains is for a very large open-market operation for a bond-buying program,” according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “The format globally now is evolving around monetary expansion supporting fiscal policy and India needs to do the same.”

Bond markets risk seeing a spike in yields in the absence of such support from the RBI, said Choudhary, who predicts that India will further ramp up its fiscal stimulus in the months to come.

That’s because a three-week nationwide lockdown is set to inflict more damage on an already-slowing economy.

India’s sovereign curve bull steepened as traders cheered the RBI’s sweeping measures on Friday, but a chunk of the initial gains vanished by the close of trading. The benchmark 10-year yield finished 8 basis points lower after having tumbled by as much as 24 basis points to 5.98%, the lowest since 2009.

Yields have fallen from this year’s high as the RBI conducted open-market bond purchases and also injected cheap rupee liquidity. Even so, calls for it to do more are growing as investors await the details of the government’s borrowing plan for the first half of the next fiscal year, which are set to be announced by Monday.

The administration had in February said it plans to borrow an unprecedented 7.8 trillion rupees during the year.

“The central bank will have little choice but to conduct large scale OMO purchases through FY21 and probably even purchase government bonds in the primary market,” Kaushik Das, chief India economist at Deutsche Bank, wrote in a note.

Below are the key Asian data and events due this week:

  • Monday, March 30: Singapore central bank policy decision
  • Tuesday, March 31: China PMI; Australia private credit; New Zealand building permits and business confidence; South Korea business surveys, industrial production; Japan jobless rate, retail sales and industrial production, Thailand trade
  • Wednesday, April 1: N.Z. house prices; Australia building approvals and RBA minutes; Japan Tankan survey, South Korean trade, Indonesia CPI, Manufacturing PMIs across Asia
  • Thursday, April 2: Japan monetary base, South Korea CPI, India PMI
  • Friday, April 3: China Caixin services PMI; Australia retail sales; Japan Jibun Bank services PMI; Singapore retail sales and PMI; South Korea and Thailand forex reserves; Philippines budget balance

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