India to Intervene as Corporate Yields at Three-Month High

(Bloomberg) -- India’s central bank stands ready to take more steps to contain bond yields if needed, according to a person with knowledge of the matter, as the fallout of the novel coronavirus outbreak roils markets across the world.

The Reserve Bank of India’s decision Wednesday to buy 100 billion rupees ($1.4 billion) of sovereign notes maturing by 2025 is targeted at narrowing the spread between government debt and corporate bonds, the person said, asking not to be identified citing rules. The RBI may also aim at the commercial paper segment, the person said. That could mean more measures aimed at shorter-tenor debt, said Sandeep Bagla, associate director at Trust Capital Services.

The move reflects concern that policy-rate reductions last year aren’t penetrating through the financial sector and that the government risks crowding out corporate borrowers. Indian companies have a record 5.9 trillion rupees of local notes maturing this year; the extra yield investors demand to own three-year top-rated corporate bonds over government notes has jumped to a more than four-month high of 109 basis points.

Indian bond yields had been rising as foreign investors dump rupee-debt and after the central bank disappointed markets by refraining from announcing interest-rate cuts this year. The yield on the 10-year note plunged more than 10 basis points to 6.22% after the RBI’s open-market-operation announcement Wednesday. They are still higher than Tuesday’s close.

The yield on the AAA-rated three-year corporate note fell to 6.84% after the RBI’s announcement from 6.92%, which was the highest since December.

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“The RBI’s actions are aimed at keeping the government bond yields under check, which in turn will keep corporate bond yields soft,” said Trust Capital’s Bagla. “Economic realities -- crash in global commodity prices, expectations of inflation easing and overall subdued demand -- are signaling that yields in India should be much, much lower.”

The person said any policy-rate reduction by the RBI would have only a muted impact given bazookas recently announced by the U.S. Federal Reserve and the Bank of England. The Fed has slashed rates to near-zero.

The person, however, said the RBI wouldn’t rule out an interest rate cut. The monetary authority’s next decision is due April 3, but rules allow Governor Shaktikanta Das to call an unscheduled meeting of the monetary policy committee. The RBI will also continue with measures to keep the rupee stable, the person said.

The central bank has in recent months used liquidity tools instead of rate cuts to bring down borrowing costs in the economy. It adopted a mix of the Federal Reserve-style ‘Operation Twist’ and the long-term repurchase operations that boost cash in the banking system.

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