Let’s talk about the RBI 1 trillion rupee bond buying program. Many compare it to the QE program. How well do you think it will do its job of limiting the surge in yields that we have seen over the past two months?
The announcement made by RBI regarding GSAP and the Gsec acquisition program is in fact a masterstroke in the sense that the markets have been constantly in a state of anxiety that the only way returns can move is towards the bottom. North. No one is really interested in adding because the element of uncertainty was killing it. Thus, the GSAP announcements alleviated many uncertainties. In fact, this means that the certainty quotients have increased considerably. Previously, bond markets had OMOs or open market bond purchases or Operation Twist. But the timing was anyone’s guess. Now, with a fixed timeline, that uncertainty is gone and we see bond yields continuing to party.
The government has a fairly large borrowing schedule this year. How do you see the yield curve going there?
So this announcement that comes on top of the current OMO / Operation Twist they are making, seems to take a good chunk of the Indian government bond supply. For the first quarter, for example, the total supply is close to around Rs 5.75,000 crore, including the state loan offer of which 1 lakh is already available for RBI to bring to the GSAP. It is beyond OMOs. This is version 1.0, which means two versions are coming. Supply absorption is much clearer from a demand leverage perspective and over the months and quarters we get more clarity on how much quantum is needed beyond current levels. This is certainly good news from a bond yield perspective. Bond yields can be expected to trade within the range. There are no major surprises on the upside and no significant downward movements as well.
The way you follow bonds, you have to follow macros very closely. What do you think is happening on the yield front? Do you think inflation or growth-induced inflation will come back eventually?
It’s hard to envision that there is just growth and no inflation, but somehow, right now, what is happening is that the bond markets in the world constantly cry wolf and the wolf is nowhere to be found. So here is a case of the constant rise in bond yields caused by anxiety across the world. A good number of countries have indeed entered positive territory, but there is also a scenario, particularly in India, where the virus appears to take over the vaccine. One must be aware of the ecosystem and cannot completely ignore the factors of inflation.
What the RBI did yesterday was come up with their balance sheet to make sure the borrowing program is non-disruptive and at the same time they made sure they didn’t lose their balance as they had slightly raised inflation forecasts. It has been a tightrope walk and the trend cannot be completely ignored. But you can certainly reduce the impact.