InvestorQ : Why is the RBI planning to buy bonds worth Rs.3 trillion in the current fiscal? What could be the outcome of that?
diksha shah made post

Why is the RBI planning to buy bonds worth Rs.3 trillion in the current fiscal? What could be the outcome of that?

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Rashi Mehra answered.
3 months ago
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This is part of what the government calls TLTRO buying of government securities in the market by the RBI to regulate interest yield movements. The RBI has confirmed that it will target buying sovereign bonds worth Rs.300,000 crore or nearly $41 billion in the current year. It has already completed Rs.250,000 crore in this year so it leaves only Rs.50,000 crore to be completed by March 2021.

The idea of this entire move is to cap the benchmark yields at about 6%. You would recollect that after the budget announced the fiscal deficit for the current fiscal year at 9.5% and next fiscal year at 6.8%, there was a sense among the traders in the bond market. This led to the bond yields on the 10-year benchmark shooting above the 6% mark. The government would be keen to ensure that there is no overshooting of yields.

The idea is to shrink the spread between the 10-year bond yield and the repo rate to 150 bps from the normal 200 bps spread. This will make the low repo rates really an effective tool to transmit the benefits to the end customer. This is done as part of Operation Twist and will help the yield curve to flatten from its steep levels currently.

The RBI was protecting the 6% yield-level, before the aggressive fiscal deficit target was announced in the budget. Benchmark 10-year yields had surged 17 bps after the Budget, which is among the highest single day spike in recent times. A rise in yields will leave banks and mutual funds holding government securities with losses in their books as bond prices are inversely related to the bond yields.

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