RBI’s Intervention in the Government Securities Market

RBI’s intervention in the foreign exchange market is pretty well known but is quite elusive in the government securities market. A recent data from RBI showed that they bought around 1100 Crores of G.Sec by intervening in the secondary market. An intervention in the foreign exchange market is usually to limit the strengthening rupee so that it does not pinch the exporters; the other is of supporting a depreciating rupee which is not done as often as the former is. In case of government securities the intervention is to stabilize shooting yields, as the cost of borrowing is a significant part while deciding the amount the government will borrow in a fiscal year. There are levels beyond which the government won’t be comfortable borrowing, these levels might be known to RBI or made known to them time to time and it is then the dealing room of the Financial Markets Department of RBI comes into action.

Some 7 to 9 months back (not sure about the exact time) there was a time when the 10 year G.Sec yield used to go beyond 8.00 % levels and then come down. The newspapers use to say that the high yields attracted investors, which you can trust once but not every now and then. It was then I was told by a senior veteran of the markets that it’s RBI intervening and not letting the yields go significantly above the 8.00 % levels.

The Indian G.Sec market is a highly news & comments driven market rather fundamentally driven will be a more apt description. Whereas, in our equity markets if one hedge fund decides to buy or sell due to excess or shortage of funds the result is something which defies all news flow or fundamentals on a given day. A recent comment by a MoF official that yields above 8.25% on the 10 year are not justified, was a signal of the levels above which the government won’t be comfortable borrowing. The RBI data showing GOI bonds being bought by RBI points out to the importance of such statements and are helpful for future course of actions as well. The frequent auctions of cash management bills reflect that the government is over-drawing from their WMA from RBI. On top of that the government is borrowing 2.5 lakh crores in the April to September period out of a total borrowing of around 4.17 lakh crore, if this slightly front loaded borrowing is done at high yields it will certainly hit the government badly a time when it’s trying not to borrow more than what they have said.

The market is expecting RBI to stop the rate hike cycle as the growth shows a slight slowdown but inflation has not peaked out completely, the RBI will be more concerned about inflation than growth. Even the government will wish to see the inflation come down as there will be elections soon in some major states where you can’t talk growth numbers as people will be concerned only about rising prices. There is a possibility that RBI might leave policy rates as it is this time and give a 25-50 bps hike if required in the next review according to the IIP and Inflation numbers in coming months. This rate hike pause can be due to the increasing pressure from banks, as the credit growth is sluggish (very less new disbursements) and the deposit growth being robust. This deposit-credit growth gap is a positive for government securities market but will affect banks margins.

The more prudent approach will be to continue with the rate hike as it’s more of demand side inflation now rather than the supply side and brush away the banking sectors concern of credit growth etc. It will be interesting to see what the RBI does as a rate hike and RBI’s stance (which has been hawkish so far) will certainly push the yields above the governments comfort level of 8.25%.