Indian central bank`s liquidity infusion plan pushes bonds to over 3-yr highs
Indian government bond prices jumped to over three-year highs on Tuesday, led by short-end gains after the Reserve Bank of India announced yet another liquidity injection.
Market participants expect continued durable liquidity injections this year, following the central bank's latest move and guidance on banking system liquidity.
CONTEXT
The Reserve Bank of India will buy bonds worth 400 billion rupees ($4.67 billion) and will also conduct 43-day repo for 1.50 trillion rupees on Thursday.
Last week, the central bank reduced repo rate for second consecutive time, and also changed its stance to accommodative.
WHY ITS IMPORTANT
The RBI is expected to keep sufficient surplus in the banking system to ensure policy transmission, and is looking at a level of around 1% of deposits, Governor Sanjay Malhotra said last week.
The surplus works out to be in the range of 2.20 trillion rupees to 2.50 trillion rupees, while daily average banking system liquidity surplus stood at around 1.70 trillion rupees for this month.
With the central bank in the middle of its rate-easing cycle, market participants believe, comfortable liquidity conditions are a pre-requisite for a quicker and effective monetary policy transmission to aid growth.
MARKET REACTION
The 10-year benchmark bond yield was down 3 basis points at 6.41%, while the three-year and five-year bond yields fell 5-6 bps to 6.12% and 6.17% respectively.
GRAPHIC
KEY QUOTES
"The indicative commitment may still require (net) durable liquidity injection of around 3 trillion rupees. Out of this, we expect around 90% to be via OMO purchases and balance via fx swaps," said A Prasanna, head of research at ICICI Securities Primary Dealership.
"RBI's surprise announcement demonstrates its commitment to maintain ample liquidity. This move is likely to sustain the bullish momentum in yields, potentially driving 10-year yield below 6.40%, with shorter duration bond yields witnessing a further slump," said VRC Reddy, treasury head at Karur Vysya Bank.
($1 = 85.6700 Indian rupees)
