RBI is buying government bonds through its G-SAP program and has bought over Rs 1.5 trillion of bonds while the government has borrowed around Rs 3.5 trillion net since April 2021. The G-SAP is a quantative easing program of the RBI, the intentions of which is to provide enough liquidity to the financial system, support government borrowing and help the economy on its covid hit growth path.
| Rs billion |
Government Bond buying through G-SAP(FY22) | 1595.75 |
Government Bond buying through Operation Twist (FY22) | 100.00 |
Government of India net borrowing (FY22) | 3507.66 |
However, unlike in US and Eurozone, where the Fed and ECB have pumped in trillions and trillions of USD and Euros in the system and have kept government bond yields at record low levels, RBI bond buying is creating nervousness among bond market participants and the market is clearly unwilling to absorb bonds at lower yields. Bond market trading volumes have dropped, bond yields have risen and market is not eagerly participating in bond auctions with many auctions being either cancelled or devolved on to the underwriters.
The difference between RBI and Fed, ECB, BoJ, who all undertake massive QE is that the latter central banks want inflation while RBI does not want inflation. Inflation is a huge tax for citizens of India and RBI has a clear responsibility to manage inflation. Hence with RBI QE, markets see this as highly inflationary and take up bond yields. Domestic retail inflation came down to 5.59% in July 21 from 6.26% in previous month. During July 21, food inflation softened to 3.96% while core inflation stood at 6.02%.India’s industrial output rose by 13.6% in June on yearly basis as compared to 29.3% growth in May 21. During June 21, manufacturing sector expanded by 13%.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 1 bps to 6.24% while 5.85% 2030 yield came down by 3 bps to 6.25%. 6.64% 2035 yield declined by 1 bps to 6.86%. 5-year benchmark bond, 5.63% 2026 yield lost 5 bps to 5.73%. 6.57% 2033 yield declined by 19 bp to 6.67%. Long-term paper, 7.16% 2050 yield increased by 1 bps to 7.20%.
The spread of 10-year bond over 5-year bond rose to 51 bps from 45 bps in previous week. The 15-year benchmark over 10-year benchmark spread was at 64 bps up by 10bps, while 30-year benchmark over 10-year benchmark spread remained unchanged at 87 bps.
Average 10-year SDL auction cut-off remained steady at 7% as compared to previous week while spread declined by 3 bps to 77 bps from 80 bps during previous week.
On weekly basis, 1-year OIS yield declined by 6 bp to 3.91% while 5-year OIS yield decreased by 3 bps to 5.24%.
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