Bullish bets on India’s short-term bonds are making a comeback after the central bank pledged to maintain abundant liquidity in the banking system to support the economy. The Reserve Bank of India surprised bond traders when it didn’t take steps to pare back on the cash glut that caused short-term rates to collapse. Instead, it reiterated liquidity support for the debt market with instruments including open-market bond purchases.
- Before the policy, it had taken some profit in the absolute short-end of the curve” with duration up to three months.
- It is felt that there is no merit in staying in hard cash when there is not going to be an immediate liquidity stance change.
- Traders were jittery going into RBI’s policy review as a range of overnight rates had dropped below the lower bound of the central bank’s rate corridor.
- Seven months of high inflation had also reinforced expectations that the bank would need to roll-back some of the excess liquidity.
- The RBI dismissed both those concerns.
- It called the plunge in money markets the result of an “asymmetrical distribution of liquidity”, which mattered less than its efforts to support growth.
- The central bank also said it’ll keep a close eye on inflation, which it sees as been largely driven by supply-side disruptions.
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