Informist, Wednesday, Oct 18, 2023
By Nishat Anjum and Aaryan Khanna
MUMBAI/NEW DELHI – After two weeks of false flags, traders in the government bond market are warming up to the idea of the Reserve Bank of India starting its potential open market operation sales of government bonds in early November, dealers said.
The timing would be a confluence of several liquidity additions to the banking system, which has largely been languishing in deficit since mid-September. Uncertainty about the timing and quantum has been a constant overhang on the bond market, since RBI Governor Shaktikanta Das said the central bank was mulling OMO sale auctions to drain liquidity.
“It is all speculation at this point, but if the RBI wants to actually do something on liquidity, then the first week of November looks like the ideal time to start,” a treasury head at a state-owned bank said. “Already, liquidity is tightening because of the festival season, so if there is a concern on core liquidity, it would be good to capture and match it with the redemptions that will add durable liquidity.”
Between Nov 2 and Dec 15, four government securities worth 2.22 trln rupees are due for redemption, which is likely to push banking system liquidity into surplus. The government’s month-end spending on salaries and pensions will also move net durable liquidity, in surplus of about 2.5 trln rupees as on Sep 22, into the banking system.
RBI Governor Shaktikanta Das said the central bank would mull OMO sales in an effort to drain liquidity. Such operations are considered a durable withdrawal of liquidity as banks park their cash until the maturity of the security that they buy from the RBI.
Typically, the RBI notified its open market operations during the COVID-19 pandemic after market hours on Monday and conducted the auction on Thursday, something that roiled the market in the beginning of the last two weeks. Dealers have now pointed to Oct 30 as the likely date of the announcement, with the auction on Nov 2. The 4.48%, 2023 bond is due for redemption first, with an outstanding of 539.25 bln rupees.
The wildcard remains the maturity of the RBI’s $5 bln dollar-rupee sell/buy swap, which takes place on Monday. Treasury officials widely expect the RBI to take delivery of the dollars, pushing over 400 bln rupees of rupee liquidity into the banking system.
However, this may not be a concern the same week as it coincides with outflows for goods and services tax, which will drain double the liquidity out of the system, dealers said.
The first OMO sale auction would not only end the anticipation, but also give some clarity on the path ahead, dealers said. It is likely to signal the RBI’s intent on the size and frequency of these auction, either through the central bank’s communication or a between-the-lines reading of the bonds sold.
A section of the market expects the RBI to hold the auctions once every two weeks, of at least 100 bln rupees each, given the two usual tranches of government spending in a month, dealers said. This would also mirror the central bank’s operations in its last round of OMO sales in 2017.
“Government cash drawdowns at the end of the month make end-October/early November the most likely period for such an announcement, but this is not our base case,” Nomura said in a note on India rates. The brokerage does not anticipate that the RBI will need to resort to OMO sales at all, but global rates and the dollar-rupee exchange rate could influence the central bank’s decision, it said.
Even as there is no communication from the central bank on this front, dealers say the RBI has a date in mind before the year-end, since it announced the tool in its October policy review rather than waiting for December. According to Nomura’s calculation, liquidity will not be in surplus of more than 158 bln rupees at the start of any week in the current quarter ending December.
The brunt of the yield movement would be felt in the bonds auctioned, which are likely to be off-the-run papers that the central bank had bought in its earlier OMOs. Its expectation remains that the seven-year tenure would be heavily targeted due to the RBI’s stock of the 5.85%, 2030 gilt, along with other gilts maturing up to 10 years.
Some market participants see government securities under the fully accessible route for foreign portfolio investors as potential papers for the OMO sale, but said the RBI was likely holding limited stock of such securities.
The yield on the benchmark 10-year bond, which jumped 13 basis points after the announcement of OMO sales, may rise only about 5 bps as the first OMO sale auction takes place, dealers said. Today, the 10-year benchmark gilt yield ended at 7.35%.
In an interview with Informist, IDBI Bank treasury head Arun Kumar Bansal said gilt yields would not be impacted significantly by the OMO sales in Oct-Mar even if the quantum stretches to 1 trln rupees.
“There are huge redemptions in November and December… I feel during that period only OMO sales will come,” Bansal said.
Where the market sees yields in the future depends on the regularity and quantum of the auction. The market thinks that the OMO sales may be limited this quarter, but the frequency may disrupt the “discounted factors”, dealers said.
If the RBI persists with using the tool in 2024, it may become its primary method of mopping up surplus liquidity from inflows associated with India’s inclusion in JP Morgan’s index for emerging market debt on Jun 28, which is likely to arrive before the inclusion, dealers said. Analysts estimate $20 bln-$25 bln worth of passive inflows in 2024-25 associated with the JP Morgan index inclusion.
Of the 31 bonds under the fully accessible route, JP Morgan has identified 23 securities with a total outstanding of about 27 trln rupees. End
US$1 = 83.26 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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