Informist, Wednesday, May 31, 2023
By Anjali and Nishat Anjum
NEW DELHI/MUMBAI – The Reserve Bank of India’s annual report for 2022-23 (Apr-Mar) has had little to no impact on the government bond market as it did not offer sufficient guidance for the current year, dealers said.
“There is nothing surprising in the report,” a dealer at a state-owned bank said. “RBI has not said anything new about inflation or growth. Why would the market pay heed if it is the same thing? Nothing has changed for the market.”
The annual report said the actions of the Monetary Policy Committee would continue to be guided by the objective of achieving the medium-term target for consumer price index inflation of 4% plus or minus 2% while supporting growth. The forward guidance was unchanged from the rate-setting panel’s own statements and from the previous annual report.
The report attributed the rise in gilt yields in 2022-23 to the off-cycle interest rate hike in May 2022 and changes in the monetary policy stance, along with the inflation outlook moving sharply higher. The yield on the benchmark 10-year bond rose 48 basis points to 7.32% in Apr-Jun 2022, settling at 7.31% at the end of March 2023.
The RBI also said medium- and long-term bond yields were largely affected by global factors such as aggressive monetary tightening and financial market instability after war broke out in Ukraine. The US Federal Reserve began its rate hike cycle in March 2022 and raised policy rates nearly 500 bps in a year.
The pointers the annual report gave were either factual or had already been discussed by central bank officials in some manner, dealers said.
They also said the report was too voluminous for them to digest in one day and more cues could emerge over the next few days.
Several dealers across primary dealerships, state-owned and private banks said they would pore over the report on the weekend to gauge the data and commentary the RBI had provided.
The annual report said the central bank’s balance sheet was up 2.5% at 63.45 trln rupees. The rise in the balance sheet has slowed as compared to the 8.5% or 4.8 trln rupees rise in 2021-22. But the slower pace of balance-sheet expansion does not make a case for open-market buys by the central bank yet, dealers said.
Due to the recent easing of liquidity in the banking system, the market widely believes the RBI will opt for open-market buys in the quarter ending March, against earlier expectations of central bank support in the December quarter.
“The liquidity situation is fine…there isn’t any need for RBI to do open-market operations,” a dealer at a primary dealership said. “We will have to see the situation in the third quarter, but for now the market is seeing a delay in open-market operations.”
Liquidity has also improved with banks receiving deposits from holders of 2,000-rupee currency notes and aided by month-end spending by governments in the form of salaries and pension payouts. Liquidity in the system is currently estimated to be in excess of 1.35 trln rupees, up from 1.04 trln rupees on Tuesday.
In 2023-24, India is seen to be better placed with its resilient financial conditions, expected dividends from reforms that have already been carried out, and growth opportunities from global economic shifts, the annual report had said. Despite the optimism on growth, the central bank’s board has increased its contingency buffer to 6.0% of its balance sheet from 5.5% in 2021-22.
The annual report also said that the RBI would seek feedback from the markets on improving regulation of the foreign exchange and gilt markets. The central bank will undertake policy research on financial markets and monetary policy transmission will remain a focus area, the report said. End
Edited by Rajeev Pai
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