RBI pledge to buy bonds sends a wave of relief through sovereign debt market

The Reserve Bank of India (RBI) pledge of buying Rs 1 lakh crore of government quarters has sent a wave of relief through the sovereign debt market. This is part of an effort to cap borrowing costs in a bid to support an economy facing the second wave of COVID-19 infections.

Governor Shaktikanta Das said the six-member monetary policy committee (MPC) voted unanimously to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward.

According to analysts at Standard Chartered Plc, as per BloombergQuint, the demand-supply dynamics remain unfavourable. It estimates the RBI would need to buy five trillion rupees of bonds to plug the demand-supply gap. Indian bond yields surged to their highest in almost a year, last month, as the government’s plans to sell 12.1 trillion rupees of debt in the fiscal year that started in April and global reflection bets dampened the demand for sovereign notes.

The RBI chief had earlier stated that the central bank bought 3.1 trillion rupees worth of bonds in the previous fiscal year to March 31, and planned similar or more purchase this year. He reiterated that the banking system liquidity would continue to remain in surplus even after meeting all requirements of the financial market segments and productive sectors of the economy. Das assured that the RBI is committed to ensuring ample system liquidity in consonance with the accommodative stance of the MPC.

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“When I say ample liquidity, I mean a level of liquidity that would keep the system in surplus even after meeting the requirements of all financial market segments and the productive sectors of the economy,” he said. “The Reserve Bank would of course continue to do whatever it takes to preserve financial stability and to insulate domestic financial markets from global spillovers and the consequent volatility.”