The Indian bond markets, which deviated from the government’s record absorption plans, were bought back by the central bank.
The Reserve Bank of India (RBI) lowered the reverse REPO rate to free up more money for loans, fuelling the rally in short-term bonds, while fuelling market hopes of a massive purchase of debt in the open market.
Bond yields fell by 26 basis points to 5.48% from 6.18% in 2024. This compares with a 10-year return which fell by 9 basis points to 6.35% after falling to 15 basis points before the announcement of the measures.
Overall, the actions taken on Friday were not as strong as some debt market participants had expected. Traders hoped for larger measures, such as a timetable for buying debt, and some even demanded dramatic measures, such as the direct purchase of government debt by RBI.
The market is disappointed because no specific measures have been taken for the government bond market, said Lakshmi Ayer, investment director of Kotak Mahindra Asset Management.
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Since there is no evidence of aid for bond purchases on the open market, it would be difficult to meet such a large supply of government bonds. Longer harvests can remain under pressure.
After the Narendra Modi government announced record loan growth, the bond market has declined in the past two weeks. Primary dealers in public debt auctions charged higher bidding costs for the second week in a row, underlining market concerns about oversupply.
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Following these announcements, the authorities managed to sell the debt of Rs.200 billion as planned.
In particular, RBI announced that it would provide banks with Rs 500 of cheap money to buy bonds from notional creditors and improve the methods and means of early payment available to authorities.
India’s plight is also reflected in other Asian markets, as governments are finding it difficult to finance the fight against the slowdown in growth caused by the coronavirus. While the central banks of Australia and New Zealand have started mass bond buying to reduce the cost of borrowing, the RBIs have largely refrained from taking such measures.
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The government has already announced a $2.6 billion fiscal stimulus for the poorest. The United States is expected to make further commitments in the near future.
The plan for financing the upcoming deficit is rather vague, said Suyash Choudhary, Mumbai’s fixed income asset manager for the IDFC. To be honest, RBI can wait until the actual loan announcement before announcing the relocation plan.