RBI Keeps India Traders Guessing on Bond Purchases, Again

(Bloomberg) -- For the most part, Indian sovereign bonds had priced in the central bank holding rates. It was the absence of guidance on debt purchases and the extent of the economic slowdown that left traders disappointed.

The yield on most-traded 5.79% 2030 notes rose four basis points to 5.86%, after climbing as high as 5.89%, following the Reserve Bank of India’s decision Thursday to keep the key policy rate unchanged at a record low. The yield on 6.19% 2034 bonds also gained four basis points, and the rupee was steady.

The RBI held the repurchase rate at 4%, as it chose to wait for inflation to cool before adding to steps aimed at supporting a fragile economy. Gross domestic product is set to contract in the fiscal year through March 2021, Governor Shaktikanta Das said, without giving a specific forecast.

“The pause in rates was on expected lines, but what may have disappointed the market is the lack of future visibility whether in terms of rate cuts or any growth outlook,” said Arvind Chari, head of fixed income at Quantum Advisors Pvt. “The RBI may continue to remain tactical on the open-market operations announcements, which has served it well.”

Traders have been awaiting word from the central bank on how it plans to manage the record 12 trillion rupees ($160 billion) of borrowings. The RBI has resorted to discreet secondary market purchases and done two Federal Reserve-styled Operation Twists of 100 billion rupees each this fiscal year. In comparison, Indonesia has waded deep into debt monetization.

“Yields rose on rate status quo as well as no RBI action on further liquidity measures to support the market,” said Avnish Jain, head of fixed income at Canara Robeco Asset Management Ltd. “However, the RBI has done ad-hoc OMO purchase/Operation Twist whenever yields have gone up, and market participants would be wary of the same.”

Asia’s third-largest economy is struggling to recover from one of the world’s biggest lockdowns, which brought most industries to a virtual halt but failed to slow the spread of the coronavirus outbreak. The RBI has pumped in billions of dollars into the financial system and cut its key rate by 115 basis points this year to encourage banks to lend more. Yet loan growth has been languishing because of fears of more bad loans.

Still, some investors said that relatively modest gain in yields shouldn’t be mistaken as a likely end to the aggressive easing cycle.

“Today’s inaction in no way suggests a U-turn in interest rate trajectory,” said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management. “Growth worries remaining, the accommodative bias suggests scope for further easing as inflation recedes in the second half of the fiscal 2021.”

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