RBI G-SAP a mishap for bond bears; How RBI’s Rs 1 lakh cr instrument helps stop yields sag: EXPLAINED

Lakshmi Iyer, CIO-Debt, Kotak Mutual Fund

By Lakshmi Iyer

The primary Financial Coverage Committee (MPC) assembly of the brand new fiscal yr was consistent with expectations on all key parameters. The MPC members voted unanimously to maintain charges on maintain, consistent with the market and our expectations. It additionally reiterated its accommodative stance and moved from time-based steering to extra state-based steering – it is a welcome transfer. The Committee famous that it’s going to “proceed with the accommodative stance so long as essential to maintain progress on a sturdy foundation and proceed to mitigate the affect of COVID-19 on the financial system, whereas making certain that inflation stays throughout the goal going ahead”.

What actually stole the present was the announcement of G-SAP (secondary market G-Sec acquisition program). Beneath this program, the Reserve Financial institution of India (RBI) will commit upfront to a certain quantity of buy of presidency securities, in an try to offer extra certainty to bond markets. For present quarter Q1 FY 2022, it has introduced G-SAP of Rs 1 lakh crore. This is a crucial growth on condition that markets had been gripped with heightened nervousness with respect to the dimensions of presidency bond provide.

The RBI additionally clarified that the G-SAP will run alongside different devices of the RBI, ie, longer-term repo/reverse repo auctions, foreign exchange operations, operation twist, and different OMOs (open market operations). The RBI additionally introduced its determination to conduct VRRR (variable price reverse repo auctions) auctions of longer tenor (earlier 14 days), as a liquidity administration operation. Whereas G-SAP helps put a lid on long-term bond yields, we might see some small rise briefly time period yields to the lengthy tenor VRRR (particulars awaited). Thus we might see some flattening of the yield curve from the present ranges.

Method ahead

Market inhibitions with regard to the mammoth authorities borrowing program for now shall be put to relaxation. Right now’s measures don’t rule out volatility in bond markets, therefore specializing in constructing a excessive grade portfolio bucketed as per one’s horizon might nicely be a approach ahead for mounted revenue traders. Switching out of brief/lengthy length funds into in a single day / liquid funds might simply be shopping for peace of thoughts within the type of lowered volatility, however might not essentially result in a greater funding end result.

The present yield curve steepness (which has priced in fairly a number of negatives) might not warrant such a transfer. Any change in coverage path can be gradual, each time it’s effected and we count on the RBI to offer sufficient alerts to the market concerning the identical and guarantee orderly evolution of the yield curve. Monitoring world cues are equally necessary as we’ve got seen rise in commodity costs stoke worry of inflation. Crude oil is a key commodity which may steer India’s inflation fortunes fairly meaningfully both approach.

Lakshmi Iyer is CIO-Debt & Head-Merchandise at Kotak Mahindra Asset Administration Firm. These are the writer’s personal views.

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