You are here: Home » Economy & Policy » News
Business Standard

Govt asks RBI to lower bond yields as inflation risks spiral: Report

The government's request could complicate the RBI's policy of withdrawing liquidity from the market, which marks a shift away from an ultra-loose monetary stance.

Topics
RBI monetary policy | India bond market | India economy

Reuters  |  New Delhi 

Photo: Bloomberg
Photo: Bloomberg

India has asked its central bank to either buy back government bonds or conduct open market operations to cool yields that have hit their highest since 2019, as inflation risks push foreign investors to sell, a government source told Reuters on Monday.

The 10-year benchmark bond ended at 93.69 rupees on Monday, yielding 7.46%, after earlier reaching a high of 7.49%. "The discussion with the RBI (Reserve Bank of India) is at an advanced stage as current yields are not at comfortable levels," the government official, with direct knowledge of the matter, said on condition of anonymity.

The official said government expects the RBI to conduct a switch operation, offering investors a chance to exchange their short-dated bonds for debt with a longer maturity, or to buy back government bonds within the next two weeks.

The official said RBI will take a decision on the timing and size of any bond purchases next week. The RBI and the finance ministry did not immediately respond to messages seeking comment.

The request from the government could complicate the RBI's policy of withdrawing liquidity from the market, which marks a shift away from the ultra-loose monetary stance it took during the COVID-19 pandemic.

The RBI surprised markets last week by raising its key interest rate by 40 basis points to 4.40% to fight inflation - its first hike in nearly four years. Annual retail inflation accelerated to almost 7% in March, its highest in 17 months and above the upper limit of the central bank's 2%-6% tolerance band for a third straight month.

New Delhi also expects the RBI to intervene in the rupee market to contain volatility after the currency closed at its lowest level of 77.47 against the dollar, the government official said.

Sell off

Foreign portfolio investors have sold $697 million of government securities since April 1 and $1.18 billion this year in total, according to traders. "I have exited India completely for now," one trader with a foreign fund, who did not want to be named, told Reuters. He has sold $200 million of government securities and $70 million of equities.

"RBI needs to raise more rates to fight inflation." He also said the RBI's intervention in the market was not sustainable as forex reserves were depleting, and that he would re-enter the market only after the central bank raises rates further and the rupee closes in toward 80 against the dollar.

India's foreign exchange reserves fell by $2.695 billion to $597.728 billion on April 29, according to RBI data, marking the eighth straight week of declines and the first time falling below $600 billion in a year.

(Reporting by Aftab Ahmed; Editing by Catherine Evans)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, May 09 2022. 18:47 IST
RECOMMENDED FOR YOU
.