The spread or the difference between India’s policy rate and the government bond yield has widened substantially since August, indicating hardening of market rates even though the policy rate has not changed. On 22 December, a Rs3,000 crore floating rate bond auction devolved on the primary dealers who buy and sell such securities. Besides, the rise in the bank’s liquidity coverage ratio, or LCR, has also contributed to the liquidity issue, at least for some banks. Intervention in bond marketIndeed, bond sales under OMO will also increase liquidity and encourage banks’ bond buying, but RBI needs to be more creative to restore the confidence of banks and bring them back to the bond market. If RBI refuses to acknowledge that all is not okay in the bond market, managing government’s Rs6.06 trillion gross market borrowing in 2019 will not be easy.

Source: Mint February 04, 2018 18:00 UTC