Through the Lens – Fixed Income Outlook

Due to the second wave of Covid-19, rate hike expectations have been pushed into next financial year provided we do not have a severe third wave and we are able to vaccinate majority of the population. The RBI governor has indicated that premature withdrawal of accommodative monetary policy stance can reverse the trepid growth momentum which has built up in the economy.

- Murthy Nagarajan

RBI is expected to intervene decisively, especially in the short end of the curve to support bond prices as the government and corporates are expected to borrow in this segment. RBI’s main objective is to foster economic growth over the coming financial year while keeping a close watch on inflation. RBI has stated its intention to ensure orderly evolution of the G-Sec curve, reduce volatility to ensure a stable rate structure and is expected to support the government borrowing program.

RBI Interventions:

• RBI bought almost Rs 27,000 crores worth of 10year G-Sec and canceled an auction during the month. With this buying, RBI now holds more than 65% of 10-year papers.

• RBI has bought Rs 1.73 Lakhs crores worth of G-Secs, of which Rs 1.20 Lakhs were through G-SAP (Government Securities Acquisition Program), Rs 43,000 crores in secondary market and Rs 10,000 crores in Operation Twist.

• RBI has also changed the primary auction up to 14 years to uniform price auction from multiple price auction. In uniform price auction, all the successful bidders will get the cut-off price unlike the multiple price auction, in which successful bidders got at the price at which they had bid in the auction. This is expected to lower the borrowing cost of the government in a rising interest rate scenario.

• In the MPC, governor announced GSAP-2 worth Rs 1.2 trillion for the July-Sep quarter which was expected. Adding Rs. 10,000 crores of state loans in GSAP-1 gave expectations that RBI might add another Rs.1020,000 crores of SDL buy back in GSAP-2 as well.