India asks RBI to buy back government bonds, open market operations

38
2
India asks RBI to buy back government bonds, open market operations

India has asked it to buy back government bonds or conduct open market operations to cool yields that have hit their highest since 2019, as inflation risks push foreign investors to sell, a government source told Reuters on Monday. The 10 year benchmark bond ended at 93.69 rupees on Monday, yielding 7.46%, after earlier reaching a high of 7.49%. The RBI Reserve Bank of India is at an advanced stage in the discussion as current yields are not comfortable levels, according to a government official with direct knowledge of the matter, who said on condition of anonymity. The government expects the RBI to conduct a switch operation, giving investors the chance to exchange their short-dated bonds for debt with a longer maturity, or to buy back government bonds within the next two weeks. The RBI will make a decision on the timing and size of bond purchases next week, according to the official. The finance ministry and the RBI did not respond to a request for comment. The RBI surprised markets last week by raising its key interest rate by 40 basis points to 4.40% to fight inflation - its first hike in nearly four years, which could complicate the central bank's policy of withdrawing liquidity from the market. Retail inflation rose to 7% in March, its highest in 17 months and above the upper limit of the central bank's 2% -- 6% tolerance band for a third month in a row. New Delhi expects the RBI to intervene in the rupee market to contain volatility after the currency closed at its lowest level of 77.47 against the dollar, according to a government official. Foreign portfolio investors have sold $697 million of government securities since April 1 and $1.18 billion this year, according to traders. One trader with a foreign fund, who did not want to be named, told Reuters that I have exited India completely. He has sold $200 million of government securities and $70 million of equity. RBI needs to raise rates to fight inflation. He said that the RBI's intervention in the market was not sustainable as forex reserves were depleted, and he would re-enter the market only after the central bank raises rates further and the rupee closes in toward 80 against the dollar. India's foreign exchange reserves fell by $2.695 billion to $597.728 billion on April 29, the eighth straight week of declines and the first time falling below $600 billion in a year, according to RBI data.