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Bond Market Alert: RBI goes for big bang twist!

RBI comes to the rescue of Bond markets, yet again in a big bang manner – clearly indicating Central Bank’s intent to keep rates low in the economy.

Though the GDP print of -23.9% is likely to disappoint the market, Bond market is clearly enthused with today’s announcements made by RBI.

1. Additional Open Market Operations:

RBI goes for additional OMOs of 20,000 Cr in two tranches, over and above the 2 OMOs of similar amount announced last week. This should infuse more liquidity and keep yields low.

2. Additional Term Repo operations:

RBI has announced Term Repo operations of 1Lakh Cr at floating rate (i.e. at the prevailing repo rates) in Sept mid. This should help Banks to reduce the cost of earlier LTROs done at 5.15% to now 4%, thus easing the rates further and creating more surplus for banks and boosting their NIMs.

3. Held to Maturity (HTM) hike of 2.5%:

HTM limit for Banks has been raised from current 19.5% to 22% which means additional 2.5% of deposits could be held as HTM securities for second half of year. This could free up the banks to buy another 4-6L Cr and can actually account for the bulk of second half borrowing calendar of Govt. This is a hugely positive step and can immediately ease the yields in trade tomorrow.

All the above measures are of immense significance as it eases the nerves in Bond markets where yields have been flaring up for last one month. It also puts forth a more accomodative and all-out stance of RBI going forward - which they have acknowledged in commentary. This shows that the RBI, like most other Central Banks, will do what it takes, to keep yields lower. 10 year bond yields are likely to move back to the 6% mark post today’s announcements.

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