India has asked its central bank to either buy back government bonds or operate in the open market to hit its highest level since 2019, a government source told Reuters on Monday, because of inflationary risks to foreign investors. inspire you to sell.
The 10-year benchmark bond ended at 7.46%, from an earlier high of 7.49%.
“Discussions with the RBI (Reserve Bank of India) are at an advanced stage as the present yields are not at a comfortable level,” said a government official with direct knowledge of the matter, on condition of anonymity.
The official said the government expects the RBI to conduct a switch operation, allowing investors to exchange their short-dated bonds for loans with longer maturity or buy back government bonds within the next two weeks.
The official said the RBI will decide next week on the timing and size of any bond purchases.
The RBI and the finance ministry did not immediately respond to messages seeking comment.
The government’s request could complicate the RBI’s policy of withdrawing liquidity from the market, which marks a shift from the ultra-lax monetary stance taken during the COVID-19 pandemic.
The RBI stunned the markets last week by raising its key interest rate by 40 basis points to 4.40% to fight inflation – its first hike in nearly four years.
Annual retail inflation rose to around 7% in March, the highest in 17 months and exceeded the upper limit of the central bank’s 2%-6% tolerance band for the third month in a row.
The government official said the Center also expects RBI to intervene in the rupee market after the currency closed at its lowest level against the dollar on Monday.
sell it
According to traders, foreign portfolio investors have sold government securities worth $697 million since April 1 and a total of $1.18 billion this year.
A trader with a foreign fund, who did not wish to be named, told Reuters: “I have completely exited India for now.” He has sold government securities worth $200 million and equities worth $70 million.
RBI needs to raise more rates to fight inflation.
He also said that RBI’s intervention in the market was not sustainable as forex reserves were depleting, and he would re-enter the market only after the central bank hikes rates further and the rupee closes near 80 against the dollar.
India’s forex reserves fell by $2.695 billion to $597.728 billion on April 29, according to RBI data, marking the eighth straight week of decline and falling below $600 billion for the first time in a year.