February 1, 2018 / 8:04 AM / 16 days ago

RBI not in talks with government on debt purchases - source

NEW DELHI (Reuters) - The Reserve Bank of India is not in talks with the government to conduct open market purchases of government bonds, a source familiar with the central bank’s thinking said, denying a media report that the central bank might consider such steps to boost the debt market.

Financial news provider Newsrise cited a senior finance ministry official as saying that the RBI might buy bonds through open market operations and in secondary markets to support New Delhi’s borrowing programme.

But a source familiar with the RBI’s thinking said there were no current talks with the government about bond purchases.

The source also said no decision had been taken to increase the foreign investment limit in debt. NewsRise had separately reported the government and the RBI were in talks to raise the limit for foreign investment in sovereign debt, citing an interview with Economic Affairs Secretary Subhash Chandra Garg.

Bonds fell, sending yields higher, after the Reuters report, in a day of whipsaw trading.

The benchmark 10-year bond yield had earlier risen as much as 8 basis points to 7.60 percent, before falling to as low as 7.49 percent after the NewsRise reports. The yield was last trading at 7.55 percent.

A finance ministry official declined to comment.

The rupee also trimmed its gains to trade at 64.05/06 to the dollar after touching a high of 63.72 earlier in the day.

Bond investors are on edge ahead of the Reserve Bank of India’s policy review on Feb. 6-7 amid worries about whether the central bank would become more hawkish on inflation after the 2018/19 budget presented on Thursday raised spending for agriculture and lifted minimum support prices for crops.

India’s bond market has slumped in recent months, with bond yields having risen as much as 117 points since the end of June due to concerns about rising inflation, tightening liquidity and worries about the government’s fiscal deficit.

Investors now fear sentiment could weaken even further after India on Thursday widened its fiscal deficit target for the year starting in April to 3.3 percent of gross domestic product from its previously mentioned projection of 3.0 percent.

The falls and a budget that disappointed are leading to hopes the RBI or the government could take steps to support markets, especially as state-run lenders, the biggest bond investors, have significantly pared debt purchases because of likely hefty mark-to-market losses in their portfolios.

Any move towards bond purchases would be especially welcome after recent comments from Deputy Governor Viral Acharya warning about the potential losses being suffered by state-run banks in government debt, which markets interpreted as signalling to state banks to pare bond holdings.

A foreign bank trader said that if the central banks buys debt, it would be “great news” for markets.

($1 = 63.75 rupees)

Reporting by Suvashree Dey Choudhury; Editing by Nick Macfie

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