Rajan Seen Buying $10 Billion of Rupee Bonds as Cash Runs Shortby
First open-market purchase of bonds in two years due Monday
Nomura says RBI to buy as much as $7.5 billion by March
The first bond purchases by India’s central bank in almost two years will probably be followed by even larger buying as lenders run short of cash and foreign money leaves.
The Reserve Bank of India said last week it will buy as much as 100 billion rupees ($1.5 billion) of sovereign debt on Monday. Bank of America Merrill Lynch says the RBI needs to inject between $8 billion and $10 billion through such open-market operations by March, including the current operation, while Nomura Holdings Inc. sees a total of $6 billion to $7.5 billion. SBI DFHI Ltd. predicts bond buying of about $9 billion.
The purchases are designed to help curb short-term rates amid advance-tax payments by companies, demand for funds in the wedding season and outflows of foreign cash before the U.S. raises interest rates. Benchmark 10-year yields advanced last month by the most since June and that’s already beginning to have an impact on Prime Minister Narendra Modi’s borrowing plans. Primary dealers rescued a sovereign-debt sale on Friday by picking unsold bonds, fueling speculation investors demanded higher yields.
“Infusion of liquidity through open-market purchases not only helps bring down funding costs, but also improves the supply-demand equation for bonds,” said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc. in Singapore. “Banking system liquidity has gone into a deficit mode and that needs to be addressed, especially when the RBI is having an accommodative monetary policy stance.”
Central bank Governor Raghuram Rajan said he “will use the space for further accommodation, when available,” even as he left the benchmark repurchase rate unchanged at 6.75 percent after a review on Dec. 1. The average banking-system liquidity was in a deficit of 812.9 billion rupees in November, compared with a surplus as recently as September, according to calculations by Kotak Mahindra Bank Ltd.
Spending on everything from cars to gold climbs during festivities that kick-off typically in September with the homage to Ganesh, the elephant god of prosperity, and run through mid-November with Diwali, the festival of lights. That’s followed by months that are considered auspicious for weddings.
Three-month commercial paper yields have climbed 25 basis points since Sept. 30 to 7.76 percent, poised for their biggest quarterly jump since the period ended March 2014. The RBI last purchased debt in the open market on Jan. 22, 2014.
Rajan’s policy comments and the plan to boost cash helped halt a two-month slump in bonds that had seen the 10-year yield jump 25 basis points over October and November. The RBI, which has typically been using repurchase auctions of up to 14 days to manage liquidity, added 210.5 billion rupees via a 28-day contract on Friday. Even so, the auction results damped investor sentiment, causing the 10-year yield to rise four basis points to 7.76 percent. It fell one basis point on Monday.
Long-term repos are “no substitute for permanent liquidity,” Bank of America economists Indranil Sen Gupta and Abhishek Gupta wrote in a Dec. 3 report. The $8 billion-$10 billion injection through bond purchases should cut the 10-year yield to 7.5 percent levels, they wrote.
Money has flown out of Indian markets as increasing odds that the Federal Reserve will raise borrowing costs at its Dec. 15-16 meeting sapped demand for developing-nation assets. Overseas holdings of India’s local-currency sovereign and corporate notes fell 46.9 billion rupees in November, the most since May, to 3.50 trillion rupees. Stocks saw withdrawals of $1.1 billion, contributing to a 2.1 percent drop in the rupee, the biggest in Asia.
The rupee’s drop to 67 per dollar and a subsequent rebound on Friday prompted speculation the central bank intervened by asking state-run lenders to sell dollars to support the local currency. That could be worsening the domestic cash squeeze. Borrowing costs rose at an auction of six-month treasury bills last week, with the government selling 182-day notes at a yield of 7.2308 percent, the highest since September.
“There’s a need for more open-market operations to buy debt in order to curb local bond yields and sustain them at lower levels,” said Soumyajit Niyogi, an interest-rate strategist at SBI DFHI in Mumbai.