QE India

The smartest banker in the world knows its coming

http://www.livemint.com/Home-Page/SJmLg0fRKkiyPnFiwVRAtO/RBI-to-buy-up-to-Rs-10000-cr-of-govt-bonds-via-auction.html

The Reserve Bank of India (RBI) on Wednesday said it will buy up to Rs.10,000 crore worth of government bonds through an auction to infuse long-term liquidity in the banking system, the first such auction since January 2014.

RBI has offered to buy four government securities for an aggregate value of Rs.10,000 crore through an auction on 7 December, saying that the move is based on its assessment of “prevailing and evolving liquidity conditions”.

The move comes a day after RBI governor Raghuram Rajan said that borrowings from the repo window suggest there is plenty of liquidity in the system.

“We primarily provide liquidity because the system needs it. A good measure is how much entities are borrowing from the various repo windows and they haven’t been borrowing excessive amount, which suggests that there is plenty of liquidity,” Rajan had said in his post-policy interaction on Tuesday.

Bond markets, however, have taken a different view.

Bond traders have been asking for a more durable liquidity infusion through OMO (open market operation) bond purchases in addition to the liquidity that the central bank infuses through the regular repo auctions.

Treasurers estimate the liquidity deficit to be around Rs.1 lakh crore currently.

Outstanding borrowings by banks from the various repo windows stood at about Rs.80,000 crore as of Tuesday.

In its Wednesday release, RBI also said that it would infuseRs.25,000 crore through a 28-day repo tender on 4 December.

Traders had attributed the tight liquidity as one of the reasons for the rise in government bond yields in the past two months.

The 10-year benchmark yield has surged by 20 basis points in the past two months, although it slipped 6 basis points after RBI sounded dovish on inflation in its bi-monthly policy on Tuesday.

One basis point is one-hundredth of a percentage point.

“This one OMO purchase can arrest upside of the yield, but for a sustained rally, we would need more such auctions. Current and future liquidity conditions also warrant more OMOs,” said Soumyajit Niyogi, analyst for interest rates at SBI DFHI primary dealership.

RBI has always maintained that it buys government bonds through OMO to infuse liquidity and not to support bond yields.

Rajan had reiterated the same on Tuesday. “We don’t determine liquidity to help the bond market, it is incidental,” Rajan had said.

The RBI governor had also said that the rise in bond yields is due to several reasons, one of them being a rise in US treasury yields.

Expectations that the US Federal Reserve will hike rates in its December meeting have driven US treasury yields up and bond yields across emerging markets have also mirrored the move.

Back home, dealers expect the 10-year benchmark yield to ease by at least 5 basis points due to the OMO announcement.

Jayesh Mehta, treasurer at Bank of America-Merrill Lynch expects the 10-year yield to ease to about 7.65%.

“This would definitely add to the rally,” Mehta said.