The Reserve Bank of India (RBI) has a huge responsibility of managing Rs 22 lakh crore market borrowings of the Centre as well as of state governments with the lowest cost or yield in 2020-21.The going was good initially as yields were under control and the RBI had also cut rates and infused surplus liquidity in the market.
But things changed dramatically in the August monetary policy committee (MPC) meeting of the RBI when the committee decided to keep the repo rate unchanged at 4 per cent.
The MPC was concerned about the rising inflation or the consumer price index (CPI)-based inflation, which it tracks to set the short-term interest rates. The CPI inflation had already touched nearly 7 per cent in July as against the RBI's target of 4 per cent with the maximum upward deviation to 6 per cent.
The MPC minutes had also expected the headline inflation to remain at elevated levels in the July-September quarter of 2020-21. The committee said even in the food prices, the upside remains. "Protein based food items could also emerge as a pressure point ," said the RBI Governor.
So, all doors are shut for any cut in the interest rates.
These indications from the RBI were enough to send the government bond market into a tizzy. The yields in the 10-year benchmark government securities which plunged to 5.7 per cent before August surged to 6 per cent last week. The GST-revenue gap too added to uncertainty as the government reached out to the RBI for helping the states in additional borrowings.
That meant the cost of borrowing for the Centre as well as states would go up substantially. In fact , a large part of the borrowing especially from states will take place in the second half of the current fiscal.
Meanwhile, the RBI is singing a different tune when it comes to the inflation outlook. "There are indications that food and fuel prices are stabilising and cist push factors are moderating," said RBI today.
The RBI had added that the recent appreciation in rupee is working towards containing imported inflationary pressure.
This statement from the RBI would certainly soothe the frayed nerves in the debt market to soften the yields.
Similarly, the RBI has also opened the doors for the banks to acquire additional G-sec by hiking the held to maturity (HTM) investments from 19.5 per cent to 22 per cent for a period of six months till March 2021. The HTM portfolio guards the banks from mark to market losses as there is no such requirement for investments kept for maturity.
This enhanced HTM limit of 2.5 per cent would allow banks to buy anywhere between Rs 2-3 lakh crore of additional government securities in 2020-21.
In fact, the risk averse banks would happily oblige the government as there are hardly any investment or credit deployment opportunities.