RBI’s Decision to Revive Bond Market

Why in news?

Reserve Bank of India has announced to buy bonds worth Rs 100 billion to meet durable liquidity needs.

What is the status of bond market?

• Earlier benchmark yield on government debt was 6.35 per cent at the time of demonetisation in 2016.
• In 2017, the benchmark yield on government debt has shot up and now it is touching a very dangerous 7.8 per cent.
• Inflation looks set to return, driven not just by domestic factors but also the uncertainty about the path of crude oil prices.
• Recent months saw INR 90 billion flow out of the debt markets, the total outflow of Rs 155 billion was the highest in 16 months.
• Due to thisthe markets have been flooded with sovereign and quasi-sovereign paper increasing unwillingness to mop up government debt, which caused treasury losses.

What is the decision of RBI about?

• In its latest effort to cheer up the market, the Reserve Bank of India has announced that it will buy bonds worth Rs 100 billion.
• This decision is taken in order to meet durable liquidity needs going forward.
• There was some hope on the RBI’s behalf that greater openness to foreign portfolio investors (FPIs) would help send down bond yields.
• As a result, the RBI after consultation with the Securities and Exchange Board of India announced a series of measures to liberalise the purchase of bonds by FPIs.
• These measures were an apparent relaxation of the minimum residual maturity period requirement and crucially an increase in the limit for FPI investment in central government securities.

What are the concerns with RBI’s decision?

• The residual maturity requirement was replaced by a stringent requirement that investment in securities of any category with residual maturity less than a year must be 20 per cent or less than of the FPI’s total investment in that category.
• RBI introduced “concentration” requirements, which have put off many investors, among other things an FPI could not buy a majority of any issue of a corporate bond.
• The market saw these and other requirements as detached from ground realities and counter-productive, they also judged the macroeconomic and fiscal situation and have not done so favourably.
• Thus RBI which is entitled to stabilise the currency’s movements must avoid being seen as attempting and failing to fight the markets.

Source: Business Standard