New Delhi: India’s central bank will buy bonds and conduct a foreign-exchange swap to inject the equivalent of $16 billion into the banking system. Bonds gained.
The Reserve Bank of India will purchase 1 trillion rupees ($11 billion) of bonds this month, Governor Sanjay Malhotra said Friday, as the monetary authority cut the key benchmark rate by 25 basis points. It will also carry out a $5 billion FX swap in December, under which it will buy dollars now and sell them back three years later.
The RBI’s bond purchases and FX swap are expected to offset the cash drain caused by its dollar sales in the currency market as it supports a weakening rupee which has emerged as Asia’s worst-performing currency this year. Such a policy would also cap a rise in market interest rates and cushion an economy contending with punitive US tariffs.
The main purpose of open-market bond purchases is to infuse primary liquidity and not to influence bond yields, Malhotra said.
India Yields Drop on RBI Rate Cut, Bond Buy Announcement
This is a good move for policy transmission as it will supply liquidity as well as bring down bond yields, said VRC. Reddy, head of treasury at Karur Vysya Bank. The 10-year yield should come down further to 6.40% by December-end, he said, adding the only dampener for bonds is the FX swap as it reduces the size of cash injections via bond purchases.
The yield on the benchmark 10-year note fell by as much as six basis points to 6.45% — the most since Aug. 28. That on the 5-year bond fell as much as ten basis points to 6.14%.
The one-year onshore forward premium in the secondary market fell 16 basis points to 2.37%. The rupee pared gains and was trading 0.1% higher at 89.89 per dollar after rising as much as 0.3% earlier.
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