RBI comes to the rescue of Bond markets, yet again in a big bang manner – clearly indicating Central Bank’s intent to keep rates low in the economy. Though the GDP print of -23.9% is likely to disappoint the market, Bond market is clearly enthused with today’s announcements made by RBI.
1. Additional Open Market Operations:
RBI goes for additional OMOs of 20,000 Cr in two tranches, over and above the 2 OMOs of similar amount announced last week. This should infuse more liquidity and keep yields low.
2. Additional Term Repo operations:
RBI has announced Term Repo operations of 1Lakh Cr at floating rate (i.e. at the prevailing repo rates) in Sept mid. This should help Banks to reduce the cost of earlier LTROs done at 5.15% to now 4%, thus easing the rates further and creating more surplus for banks and boosting their NIMs.
3. Held to Maturity (HTM) hike of 2.5%:
HTM limit for Banks has been raised from current 19.5% to 22% which means additional 2.5% of deposits could be held as HTM securities for second half of year. This could free up the banks to buy another 4-6L Cr and can actually account for the bulk of second half borrowing calendar of Govt. This is a hugely positive step and can immediately ease the yields in trade tomorrow.
All the above measures are of immense significance as it eases the nerves in Bond markets where yields have been flaring up for last one month. It also puts forth a more accomodative and all-out stance of RBI going forward – which they have acknowledged in commentary. This shows that the RBI, like most other Central Banks, will do what it takes, to keep yields lower. 10 year bond yields are likely to move back to the 6% mark post today’s announcements.
This can lead to some easing in yields and in short term is positive for Debt funds of all kinds.
There are two more events of significance, which investors will do well to make a note of:
- Govt’s second-half borrowing calendar will be out in Sep end. There is an additional requirement of over 6.5L Cr, which will have to be borrowed from the market. This could put significant pressure on yields and keep RBI on toes for more measures. Its unlikely long term yields can ease significantly given the heavy borrowing program.
- India could potentially be included in the Global Bond Indices in coming months and this could lead to significant flows in the bond market and keep yields in check.
Short duration Categories — Stay towards the short-end funds like Ultra Short, Low Duration, Short Term and Banking PSU funds. These continue to remain attractive.
Long duration Categories – Today’s measures will ease of clouds of uncertainty from these categories but investors will do well to avoid Medium Term, Income, Dynamic Bonds and Gilt funds as we expect borrowing pressure to catch up on yields soon. Though with today’s measures and intent shown, long term yields should not go up dramatically but headroom for more easing is limited. And hence, we are not very bullish on this category.
We also believe – Investors should use good levels (likely to come this month) to exit long duration funds, wherever possible in portfolios, and move towards the safe cocoons of Short duration categories gradually. For more details on portfolio specific action – please get in touch with us @ Moneyfront.