India’s recent move to buy back bonds has encountered resistance from the Reserve Bank of India (RBI), which aims to maintain a tight monetary stance despite pressure to ease. Last week, the RBI accepted bids for only a quarter of the 400 billion rupees ($4.8 billion) worth of bonds the government offered to repurchase. Traders demanded higher prices, signaling their reluctance to sell at lower yields.
The central bank’s reluctance to offer lower yields stems from its commitment to its 4 percent inflation target. Governor Shaktikanta Das has emphasized that the RBI will not consider easing monetary policy unless inflation consistently remains around this target.
However, despite the RBI’s stance, there’s pressure to address the banking system’s liquidity needs, which currently face a deficit of about 1.5 trillion rupees. The buyback of bonds helps inject liquidity into the system, providing some relief.
Market participants perceive the buyback as an opportunity to reprice the short end of the bond yield curve, indicating a strong demand from cash-rich buyers willing to pay a premium.
The government’s decision to repurchase bonds is influenced by its cash position, with tax revenues surpassing expectations. This excess revenue is being used to retire debt, contributing to the buyback initiative.
While the RBI aims to maintain the current yield curve without signaling a shift in stance, the market is closely watching for any indications of future monetary policy moves. Last week’s auction was conducted with the intention of maintaining stability in the market and avoiding speculation.
