The very crucial part of this Reserve Bank of India’s plan to resuscitate this covid-19 pandemic-hit economy so far has been to very low the total cost of the borrowing and by extension, bond yields. This recent surge in yields and the Reserve Bank of India’s lack of intervention does not seem to fit into the narrative.
Unless, this central bank is now reading from a very new script, one that features elevated bonds that yields the price in risk posed by rising inflation as well as the dire fiscal situation. The Reserve Bank of India has looked on while the 10-year benchmark government bond yield climbed 25 basis points in just some weeks.
The best central bank did not try to signal the support for the sovereign borrowing program even as the government’s bond auction last week had to be devolved to underwriters, which also led the investors to seek very higher yields on bonds on sale.
The Reserve Bank of India not only accepted these bids but also exercised the option to sell some extra amount of bonds, showing the comfort with very high yields. The central bank’s current indifference is in sharp contrast to the behavior in Apr and Jun, whenever it deftly worked behind the scenes to ward off the rise in yields.
It increasingly seems as if the recent rising streak of the total bond yields has tacit blessings of the Reserve Bank of India. The Reserve Bank of India’s seemingly inconsistent stance on yields can be explained by the different hats this wears as the debt manager to the government.
Whenever the former role requires this to minimize the cost of the borrowing for the government, the latter entails ensuring that the balance sheets of the Indian best banks, as well as financial institutions, stay protected.
Bond yields that are very less than what is warranted by the fundamentals pose a risk of very huge marked-to-market losses whenever the market eventually faces the reality check.
