RBI cautions bond vigilantes, wants 'responsible' behaviour for 'co-operative outcomes'

File photo of Reserve Bank of India (RBI) Governor Shaktikanta Das (Source: PTI)

The Reserve Bank of India has called on bond market participants to engage in a responsible manner so that all stakeholders can benefit.

In his statement at the conclusion of the three-day meeting of the Monetary Policy Committee, RBI Governor Shaktikanta Das said on February 10 that while the central bank will continue to focus on the smooth completion of the government's borrowing programme, market participants had a stake in the orderly evolution of financial conditions and the yield curve.

"It is expected that market participants will engage responsibly and contribute to co-operative outcomes that benefit all," Das said.

Das' comments come in the wake of a huge jump in government bond yields on February 1 after the budget said the Centre would borrow a massive Rs 14.95 lakh crore from the market in FY23 on a gross basis. This was over 40 percent higher from FY22 and significantly more than what the market had expected.

On February 4, when the first weekly bond auction after the budget was conducted, the government was able to raise only Rs 10,525 crore as against the notified amount of Rs 24,000 crore. At the auction, the RBI rejected bids for the 2026 and 2035 government bonds. Bids for the remaining two bonds maturing in 2023 and 2051 were either in line with or above what was hoped for, indicating the levels at which the RBI felt comfortable.

This line of thinking was reiterated by Das in his post-policy press conference on February 10.

"I would not like to state specifically what is the comfortable level (for bond yields). But the way we deal with auctions, the cancellations or the devolvements, that reflects the thinking of the Reserve Bank," Das said.

"We have constant interactions with the (bond) market. Whether they have an inherent reluctance (to bid at weekly government bond auctions), the market participants should be better placed to answer. Whenever they have any questions, we do clarify their points. If they have any concerns, we try to address the concerns taking into account various aspects. It's not that whatever market expects it will get because we also have a commitment to financial stability. At least I have not noticed or my colleagues, we have not seen any sign of 'discomfort',” he added.

The RBI and the bond market have enjoyed a fraught relationship during the last couple of years. In March 2021, with bond yields rising thanks to global and domestic factors, an RBI staff paper branded skeptics among the bond market as "vigilantes".

"The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav," the paper had said, commenting on the bond market participants who were not convinced by the RBI's promise that financial conditions would remain accommodative even as inflation remained high.

The central bank has pushed through the government's outsized borrowing programme this year. However, it faces a dilemma in repeating the trick in FY23, with normalisation of liquidity conditions gaining momentum.

"The signaling is quite clear in this meeting that despite global rates inching up and upwards risks on inflation levels, RBI will tilt towards dragging its feet on rates normalisation well into the next fiscal year as well while continuing with its liquidity management steps," said Rajni Thakur, RBL Bank's chief economist.