Bond Rout Sees RBI Liquidity Tools Take Center Stage for Traders
(Bloomberg) -- For traders in rupee sovereign bonds, the most important factor to watch out for in the Reserve Bank of India’s policy outcome Wednesday is its stance on liquidity management.
The central bank’s surprise cancellation of an open-market debt sale last month was a rare piece of good news in a market that’s been battered by concerns about rising inflation and worsening public finances.
Having had to absorb about 900 billion rupees ($14 billion) of OMO bonds since July on top of debt sold by the central and state governments, traders want to know if the reprieve from the scrapped sale will last. An answer to that will have a significant bearing on the supply-demand dynamics for sovereign notes as they head for their first annual loss since 2013.
“The only thing we want from the RBI is more clarity on its liquidity management,” Vijay Sharma, executive vice president for fixed income at PNG Gilts Ltd. in New Delhi, said in an interview. “OMO sales were the biggest and most unexpected development this year, and to an extent responsible for the sharp rise in yields.”
Sovereign bonds due in a decade capped a fourth straight monthly loss in November. The benchmark 10-year yield is up 56 basis points this year. On Monday, it ended at 7.08 percent, the highest close since Sept. 2016.
The OMO sales compounded matters as they began when demand for existing bonds was already cooling due to the RBI’s steps to soak up excess cash with the lenders in the aftermath of last November’s currency ban.
Excess liquidity with banks -- the biggest holders of rupee sovereign debt -- is down to 698 billion rupees as of Thursday, from a peak of more than 5 trillion rupees in March, according to Bloomberg Intelligence India Banking Liquidity Index.
With the narrative on India’s monetary policy path fast changing toward higher rates just when tightening in the U.S. and Europe threatens to reduce flows to local bonds, investors are counting on domestic liquidity to provide some cushion to the market.
Here are some more comments:
IDFC Asset Management (Suyash Choudhary, head of fixed income in Mumbai)
- “A significant part of the bond selloff, alongside concerns over fiscal slippage and oil prices, is because of the RBI’s OMO sales”
- “The issue at hand is that slowly and steadily over a period of time, the RBI has given so much bond supply through OMOs that most risk books that could accommodate the supply are full”
- “Given little incremental appetite to expand positions, this is now severely weighing on the market”
Standard Chartered (Nagaraj Kulkarni, senior Asia rates strategist in Singapore)
- “The market will seek clarity on the RBI’s liquidity-management toolkit"
- “Any indication that it will stop OMO sales will be perceived positively by the bond market”
FirstRand (Harish Agarwal, fixed-income trader in Mumbai)
- “We are in an over-bought zone amid heavy supply of bonds”
- Says will watch for the RBI’s outlook on inflation
©2017 Bloomberg L.P.