India seeks help from central bank to cut bond yields, says government source

A man walks behind the logo of the Reserve Bank of India (RBI) inside its head office in Mumbai, India, April 8, 2022. REUTERS/Francis Mascarenhas

NEW DELHI, May 9 (Reuters) – India has told its central bank to either buy back government bonds or conduct open market operations to cool yields that hit their highest level since 2019, as inflation risks push foreign investors to sell, a government source said. Reuters on Monday.

The benchmark 10-year bond closed at 93.69 rupees on Monday, yielding 7.46%, after earlier hitting 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, who has direct knowledge of the matter, said on condition of anonymity.

The official said the government expected the RBI to carry out a transfer operation, offering investors the option of swapping their short-term bonds for longer-term debt, or redeeming bonds from Status within the next two weeks.

The official said the RBI would make a decision on the timing and size of any bond purchases next week.

The RBI and the Ministry of Finance did not immediately respond to messages seeking comment.

The government’s request could complicate the central bank’s policy of withdrawing liquidity from the market, which marks a change from the ultra-loose monetary stance it has taken during the COVID-19 pandemic.

The RBI surprised markets last week by raising its key rate by 40 basis points to 4.40% to fight inflation – its first hike in nearly four years.

Annual retail price inflation accelerated to nearly 7% in March, its highest level in 17 months and above the upper limit of the bank’s 2% to 6% tolerance band center for a third consecutive month. Read more

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

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Foreign portfolio investors have sold $697 million in government securities since April 1 and $1.18 billion this year in total, traders said.

“I have completely left India for now,” a trader at an overseas fund, who did not want to be named, told Reuters. He sold $200 million in government securities and $70 million in stock.

“RBI needs to raise rates to fight inflation.”

He also said that the RBI’s intervention in the market was not sustainable as foreign exchange reserves were depleting and that he would only re-enter the market after the central bank raised rates further and the rupee would have moved closer to 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 consecutive week of decline and the first time below $600 billion in one year.

Reporting by Aftab Ahmed; Editing by Catherine Evans

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