India has asked its central bank to either buy back government bonds or conduct open market operations to cool yields, which have hit their highest level since 2019, as inflationary risks urge foreign investors to sell, a government source told Reuters on Monday.
The benchmark 10-year bond ended at 7.46%, having previously peaked at 7.49%.
“The discussion with the RBI (Reserve Bank of India) is at an advanced stage as current yields are not at comfortable levels,” the government official, who had direct knowledge of the matter, said on condition of anonymity.
The official said the government expects the RBI to complete a switch operation, offering investors the option to swap their short-dated bonds for longer-dated debt or buy back government bonds within the next two weeks.
The official said the RBI will make a decision on the timing and size of bond purchases next week.
The RBI and Treasury Department did not immediately respond to messages asking for comment.
The government’s request could complicate RBI’s policy of withdrawing liquidity from the market, a departure from the ultra-loose monetary stance it has adopted during the COVID-19 pandemic.
The RBI surprised markets last week by raising interest rates by 40 basis points to 4.40% to fight inflation – the first hike in almost four years.
Annual retail inflation accelerated to nearly 7% in March, a 17-month high and above the upper limit of the central bank’s 2%-6% tolerance range for the third straight month.
The center also expects the RBI to intervene in the rupee market to curb volatility after the currency closed at its lowest level against the dollar on Monday, the government official said.
sale
Foreign portfolio investors have sold $697 million worth of government bonds since April 1 and a total of $1.18 billion this year, according to traders.
“I have left India completely for now,” a trader with a foreign fund, who asked not to be named, told Reuters. He has sold $200 million worth of government bonds and $70 million worth of stocks.
“The RBI needs to raise more rates to fight inflation.”
He also said that the RBI’s intervention in the market was unsustainable as FX reserves were running low and that he would not re-enter the market until the central bank continued to hike interest rates and the rupee closes around 80 to the dollar.
India’s foreign exchange reserves fell $2.695 billion to $597.728 billion on April 29, according to RBI data, marking the eighth straight week of declines and the first time in a year below $600 billion.
