Riding high on RBI governor's assurance, bond market up for a long bull run

Experts say LTRO is the Indian version of quantitative easing, and that there should be more of it in coming days

Ten-year bond yields have fallen 16 basis points (bps) since the Union Budget on February 1. And short-term bond yields such as three-year ones have fallen 25 bps since the Reserve Bank in its monetary policy on February 6 introduced long-term repo operations (LTROs) to give banks one and three year money at 5.15 per cent, against the prevailing market rate of nearly 6 per cent. 

The bond market had earlier got a wind in its sail after the Budget showed there would be no additional borrowing. The bond yields fell nearly 10 bps in response. The southbound yields bore good news for both the government and the corporate sector owing to the low funding cost. Yields and prices move on the opposite direction.

And then, there was the announcement of LTRO of up to Rs 1 trillion. 

“Yes indeed, a lot of bullishness has come back to the bond market. The Rs 1 trillion repo at 5.15 per cent fixed is directly responsible for it. What the market hopes is that this amount could be increased further depending on utilisation. Also, the RBI clearly showed possibility of rate cuts, maybe in June,” said Harihar Krishnamurthy, head of treasury at First Rand Bank. 

“The LTRO effectively helped increase bond demand at the shorter end of the curve. The expected additional demand pulled bond yields lower. Now that there is no additional borrowing for the current year and the RBI has sparked an increase in demand for bonds, yields are likely to stay soft for a few more months,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance. 

Many in the markets say the LTRO is the Indian version of quantitative easing, and there should be more of it in the coming days. But will the central bank be able to continue with such operations in the months to come? Certainly, RBI Governor Shaktikanta Das emphatically proclaimed that it would not be prudent to discount the RBI. 

“It has to be kept in mind that the RBI has several instruments at its command that it can deploy to address the challenges that the Indian economy currently faces in terms of the sluggishness in the growth momentum,” the governor had said in his opening remarks on the policy day. 

Such confidence exuded by the RBI governor has only assured the bond market that the central bank would be there to support the market. The RBI said it would use all the liquidity infusion instruments available to make sure the call money rate remained anchored at around the repo rate. Thus, the market’s uncertainty regarding open market operations (OMOs), FX-Swaps, or dated repo instruments were cleared. 

“Despite the recent spike in inflation, reassurance with respect to the continuation of the accommodative monetary policy and indication about the further space for easing is positive for the market sentiment,” said Ram Kamal Samanta, vice-president investment at Star Union Dai-Ichi Life Insurance. 

According to Krishnamurthy, while the yields have fallen sharply for now, “further increases in repo amounts, OMO and rate cut hopes will push yields lower, and more probably now in longer term as short term has discounted the development quite a bit.” 

 Through Operation Twist, the RBI has tried to bring down the long-end yields, and that should continue. 

Hemal Doshi, vice-president (treasury) at SBI DFHI, said going forward, the “short end of the yield curve will remain anchored but the long end steepness will depend upon the maturity profile of next year's borrowing,” even as  growth and inflation dynamics will further give direction to the markets. The coronavirus pandemic can soften commodity prices, such as that of oil, which is going to be a big positive for India. 

“As long as there is no considerable improvement in global oil price, credit growth or sustained pressure from inflation, incremental measures like inclusion of bond index or LTRO would facilitate lower bond yields, and the 10-year can go down to 6 per cent level too,” said Soumyajit Niyogi, associate director at India Ratings and Research. 

The 10-year bond yields closed at 6.44 per cent on Friday.