Market borrowing of the central authorities is projected at Rs 12 lakh crore in FY22. To facilitate the federal government market borrowing programme, RBI has additionally allowed retail buyers to open gilt account with RBI. Increased provide of presidency bonds in the market may result in demand-supply mismatches, placing strain on yields.
As buyers in the federal government bonds are getting increased yields, the identical will probably be demanded on company bonds. This, in flip, results in elevated borrowing price for corporates, negatively impacting non-public investments in the nation. Similarly, increased bond yields may additional complicate the transmission of fee cuts by the central financial institution.
The onus is now on RBI to maintain a check on bond yields. In the final bimonthly financial coverage assembly (MPC), no main bulletins had been made in this regard. However, the RBI governor reiterated that the evolution of an orderly yield curve as a public good. As the financial system is steadily recovering from the recessionary part, the concern of rising inflation is getting stronger.
For occasion, inflation fee as measured by client worth index (CPI) was at a 16-month low of 4.06 per cent in January. On the opposite hand, core inflation (i.e. inflation excluding meals and gasoline) grew 5.7 per cent in January. Rising gasoline worth is additionally build up inflationary strain on the financial system. In such a situation, there gained’t be any additional fee cuts in the close to time period. The RBI Governor has assured that its accommodative stance will probably be maintained so long as essential to convey the financial system again to the expansion trajectory.
Yet, the restoration of money reserve ratio (CRR) in two phases starting March 2021 may very well be seen as step one in direction of normalisation of financial coverage. This may even put extra strain on bond yields. In this background, the central financial institution introduced the subsequent spherical of ‘Operation Twist’ to be carried out on February 25, 2021.
‘Operation Twist’ is nothing however open market operations (OMOs) the place RBI could be conducting simultaneous buy and sale of presidency securities. Through the acquisition of long-term bonds, RBI goals to push down the bond yields. And, it might assist the market borrowing programme of the federal government.
In the present situation, RBI could be having a tough ride in keeping the yields in check. The central financial institution has to take care of inflation worries together with the elevated market borrowing from each the central and state governments. RBI must actively take part in the bond market and talk it to market individuals to make sure that the bond yields are in check.