Investors are hoping for central bank intervention to stop the rising bond yields. But RBI has not taken any strong action till now to prevent the fall of Rupee and investors are losing confidence in government bonds. Lakshmi Iyer, chief investment officer at Kotak Mahindra Asset Management Ltd, used her twitter account to take a humorous dig at RBI. She used popular Bollywood song ‘Ae Kya bolti tu’ from 1998 movie Ghulam and expressed her concerns about the 10-year yield touching 8 percent. The English translation of the tweet is as following: What do you say? Yields are rising. Listen! Yes! Will OMO come? What will happen, what will be the benefit of an OMO System will get liquidity, yields will get support and market sentiment will improve, What else!!!!
Ae Kya bolti tu
Ae Yields are rising
Sun
Suna
Ayega OMO kya ?
Kya, Hoga, OMO ka faayda
Arey system ko liquidity milega, yield ko support milega, market sentiment improve hoga Aur Kya !!!!Bond trader ki kahaani Bollywood ki zubaani ? India 10yr bond yield @ 8%
— Lakshmi Iyer (@Lakshmi1876) September 4, 2018
Bond is an instrument of debt which could be issued by government or any corporate entity. Government bond or sovereign bond is issued by various national governments to borrow money from market for development projects or to support budgetary deficit. Mostly central banks are mandated organizations to sell government bonds therefore in India RBI looks after this activity. Government bonds, also known as G-Sec, are mostly issued for medium to long term and bought mostly by institutional investors like provident funds, mutual funds, insurance companies and banks. Although, Indian government allowed retail investors to purchase bonds but their share is still very low.
Government bond is among the safest investment destinations with near-zero risk. Bond yields rise when the value of bond goes down and value goes down when demand is less. The demand for bonds depends on health of the economy and government finances. In recent months fuel prices have risen and the populist measures of this year’s budget may widen budgetary deficit and dwindle government finances. This led to selloff of bonds which resulted in drop in value of government bonds and yields increase. The drop in prices of bond is what concerns asset managers like Lakshami Iyer because they invest a large chunk of money in government bonds. The Open Market Operation (OMO) is carried out by RBI to inject liquidity and stabilize markets. When RBI itself purchases government bonds, demand rises and therefore price goes up. Iyer, who oversees fixed-income investments at the Rs 1.28 trillion assets manager at Kotak Mahindra Asset Management Ltd wants RBI to go for OMO to stabilize bond market.
RBI has made a purchase of 4.2 billion dollars so far and Bank of America Merrill Lynch analysts estimated RBI might buy sovereign debt worth about $50 billion in the six months to 31 March. According to Financial Times, the countries which have very sound public finance, bond yields are equal to rate of growth of economy. But in countries like India many factors including recessions, inflation, and bank rate set by central banks can have an impact on bond yields. It will be interesting to see whether RBI acts on Iyer’s plea or not. “You have to get some lighter moments when you are not able to pinpoint when the yield climb will stop,” reacted Iyer on her tweet. The benchmark 10-year yield rose six basis points to 8.06% on Tuesday, the highest close for a benchmark bond since November 2014, while the rupee fell to 71.5750 per dollar. OMO by RBI could stabilize bond market and stop depreciation of rupee for short run, now investors like Iyer could pray to god that RBI goes for this.
