Brokers in India are banking on the central bank intervening to control bond-market volatility during this week's policy document, as the market faces a record debt supply.
The RBI has the responsibility of maintaining bond rates under control as the government begins a historic 14.31 trillion ($190 billion) in yearly debt in April. At the same time, rising oil prices threaten to exacerbate inflation, placing authorities under pressure to raise interest rates.
"With the huge borrowing program and a climate of increasing worldwide rates, support from the RBI in the form of open-market purchases is critical to keep yields maintained," said Gaura Sen Gupta, an economist at IDFC FIRST Bank Ltd.
Benchmark 10-year interest rates have climbed about 50 basis points this year, although India has indeed been largely immune to international rate rises due to a lack of supplies in March and a subdued RBI. On Monday, yields surged substantially to 6.90 percent.
In the nonattendance of central assistance, the combination of heavy supplies and speedier international policy normalization could push the 10-year yield to a top of 7.40-7.50 percent in the fiscal first half, according to Upasna Bhardwaj, an analyst with Kotak Mahindra Bank Ltd.
Traders believe the RBI will examine the foregoing on April 8:
Twists Operation
Considering that the RBI has commenced withdrawing equity from the banking sector, outright bond purchases are improbable. As per Deutsche Bank, it may deploy open-market activities and liquidity-neutral Operation Twists, in which it buys longer bonds and sells shorter-dated notes.
In October, the RBI discontinued previously discussed bond purchases. Last fiscal year, it purchased bonds worth 2.2 trillion rupees.
Banks' Headroom
The RBI may give banks additional latitude to enhance borrowing acquisitions by enabling them to keep more assets under a scheme that protects bonds from market turmoil.
Banks can already maintain 22 percent of their assets in government bonds under the so-called held-to-maturity strategy. According to Shailendra Jhingan, CEO of ICICI Securities Primary Dealership Ltd, the RBI may hike it to 23 percent. According to Citigroup Inc., the RBI may also consider extending the 22 percent relaxation.
Changes in Effects
The central bank has established a fresh $5 billion dollar-rupee sell/buy exchange, in which rupee volatility is removed by selling dollars. According to IDFC FIRST Bank Ltd, this may assist in clearing the way for open-market debt issuance.
As per Citigroup Inc., the RBI will need to give 2–2.5 trillion rupees in open-market assistance in the first half of the fiscal year.
Foreign Exchange Transactions
The RBI has been selling dollars in the major currencies to boost the rupees. As a result of this intervention depleting rupees from the financial system, the RBI may turn to vigorous FX sales, freeing up funds for bond purchases, according to Kotak Mahindra.
