Resurgence of COVID-19 dominates Monetary Policy Committee deliberations
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Synopsis
A debate about the efficacy of the central bank’s guidance appears to be intensifying within the MPC with Governor Shaktikanta Das hesitant to commit himself on a time-bound guidance while Prof. Jayant Varma declaring it to be ineffective and calling for action by the central bank.
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The resurgence of Covid virus infections dominated the Monetary Policy Committee deliberations with members worrying that economic recovery could stall leading to them suggesting that the Reserve Bank of India should dip into its arsenal to bring down long term interest rates as forward guidance has failed to keep a lid on yields.
April 20, 2021
They fear that a rise in interest rates could adversely impact prices of long-tenor securities
Market participants, especially banks, in the Government Securities (G-Sec) market, seem to be turning averse to the conversion of short-tenor securitiesinto long-tenor securities, due to fears that a rise in interest rates could adversely impact prices of the latter.
They are avoiding duration risk (the longer the maturity of a bond, the more sensitive it is to changes in interest rates), going by the results of the switch/ conversion auction of 10 G-Secs (for a notified amount of ₹2,000 crore each) conducted by the Reserve Bank of India on Monday.
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G-Sec prices on the rise
April 16, 2021
Prices of Government Securities (G-Secs) rose on Friday after the previous day’s sharp fall as the RBI did not devolve the 10-year benchmark G-Sec on primary dealers despite rejecting all bids for it at the auction.
The price of the 10-year benchmark (carrying 5.85 per cent coupon rate) ended up 27 paise at ₹98.275 (previous close ₹98.01), with its yield thawing about 4 basis points to 6.0885 per cent (6.1256 per cent).
Rejects all bids
Of the three G-Secs that were being auctioned, the RBI rejected all bids it received for the benchmark 5.85 per cent GS 2030. However, it did not devolve this paper on PDs, which underwrite the auctions. The government was planning to borrow ₹14,000 crore through this paper.
Government Securities prices tumble
April 15, 2021
Government Securities (G-Sec) prices tumbled on Thursday as the Reserve Bank of India (RBI) purchased some of the securities under its G-Sec Acquisition Programme (G-SAP) at lower than the previous closing price.
Yield up 11 basis points
The price of the 10-year benchmark (carrying 5.85 per cent coupon), which was part of the open market purchase of G-Secs under G-SAP, plummeted about 82 paise to close at ₹98.01 (previous close ₹98.825), with its yield shooting up about 11 basis points to close at 6.1256 per cent (6.0114 per cent).
Bond price and yield are inversely related, moving in opposite directions.
Of the five G-Secs that the RBI purchased under G-SAP, the purchase price of the 10-year benchmark was lower at ₹98.68 (yield: 6.0317 per cent) against the previous close of ₹98.825 (6.0114 per cent).