Fighting Covid Pandemic, The Reserve Bank Way


Last Friday, the 10-year bond yield fell 3 basis points (bps) to end the day at 6.99 per cent – the first instance of the yield closing below 7 per cent since April 7, 2022. In the first week of May as well, the 10-year bond yield dropped below 7 per cent – to 6.98 per cent, before profit-booking kicked in, lifting it above that mark. On the same day, the cut-off yield of the 10-year bond auction was fixed at 7.038 per cent – its one-year low. One basis point is a hundredth of a percentage point.

There were many reasons behind the drop in the bond yield, including a fall in the US yield and softer crude prices.

Let’s take a close look at some of the key parameters that have been influencing the bond market since the onset of the Covid pandemic.

On the last day of FY2020, the 10-year bond yield was 6.14 per cent. Since then, in the past three years, it has seen a peak of 7.62 per cent (on June 16, 2022) and a low of 5.78 per cent (July 10, 2020).

How’s the scene at the shorter end of the yield curve? The 91-day treasury bill (T-Bill) yield, which was 4.24 per cent by the end of March 2020, peaked at 6.97 per cent on March 8, 2023. Its lowest level was seen on November 25, 2020 – 2.92 per cent. Currently, it’s trading at around 6.95 per cent.

Similarly, the 364-day T-Bill yield was 4.5 per cent on the last day of FY2022. It zoomed to 7.48 per cent on March 8, 2023. Its lowest level in the past three years was on July 8, 2020 – 3.39 per cent. The current level is around 7 per cent.

How has the US bond yield behaved during this period? On March 31, 2020, the 10-year US bond yield was at sub-1 per cent level – 0.70 per cent. It rose all the way to 4.335 per cent on October 21, 2022. Its lowest level during the three-year period was even lower than it was at the end of FY2020 – 0.50 per cent (on August 4, 2020). Currently, it is trading at around 3.46 per cent.

How did the policy rate move during this period?

India’s policy rate dropped to its historic low of 4 per cent in May 2020 after ruling at 5.15 per cent till February 2020. An ultra-loose monetary policy – a combination of the lowest rate and flood of liquidity – helped the system fight the impact of the pandemic.

It remained at that level till the first week of May 2022, when in an off-cycle meeting, the Reserve Bank of India (RBI) raised its policy rate by 40 bps to 4.4 per cent. This was done a month ahead of the slated monetary policy committee meeting, and just 12 hours before the US Federal Reserve raised its policy rate by 50 bps, the highest in 22 years, to tackle the worst inflation America has seen in four decades.

The decision to raise the rate in the US followed a 25 bps increase in March, the first since late 2018. In India, the last rate hike was in August 2018, when the policy rate was raised from 6.25 per cent to 6.5 per cent.

Since the first rate hike in May 2022, from 4 per cent to 4.40 per cent, the policy rate in India has risen to 6.5 per cent through a series of hikes till April 2023 when the rate-setting body of the RBI unanimously decided in favour of keeping the rate unchanged. This was a hawkish pause and RBI Governor Shaktikanta Das’s statement repeatedly emphasised the Indian central bank’s “readiness to act, should the situation so warrant”. In his words, “It’s a pause, not a pivot.”

With the inflation in April dropping to 4.7 per cent, its 18-month low, the RBI may continue with the same stance in its June policy, but that’s a separate story.

Meanwhile, how did the policy rate in the US move during this time? It went from 0-0.25 per cent to 5-5.25 per cent.

In essence, the US has been more aggressive in its policy rate hike since the Federal Reserve has been fighting it out with a more entrenched and higher level of inflation. As a result of this, movement in the US bond yield is also sharper than what we have seen in India.

Who has gained the most from the relative stability in the Indian bond market? The government of India. And corporate India, too, as corporate bond yield is linked to government bonds and the spread between the government bond and corporate bond has shrunk, bringing the cost down for highly rated companies. 

In FY2020, the gross borrowing of the government was Rs 7.1 trillion. It almost doubled in FY 2021 – to Rs 13.7 trillion. The next year, it dropped to Rs 11.3 trillion but rose to Rs 14.2 trillion in FY2023. The estimated gross borrowing programme for the current fiscal year is even higher – Rs 15.4 trillion. Out of this, till now, Rs 2.08 trillion has been raised.

If we include the current year’s estimated borrowing, since FY2021, the total government borrowing is pegged at Rs 54.6 trillion – more than the total outstanding borrowing of the government towards the end of last decade.

Of course, net of redemptions, the net borrowing amount is less. But then, there are state development loans. From Rs 6.08 trillion in FY2020, it rose to Rs 7.78 trillion in FY2021. The figures for FY2022 and FY2023 are Rs 6.71 trillion and Rs 7.17 trillion, respectively.

As the merchant banker of the government, the RBI has steered through the massive borrowing programme during the pandemic with great finesse. It has not bought any government bonds through the open market operations since September 2021, burdening its own balance sheet. 

More importantly, along the way, the RBI has kept a hawk eye on the health of the banking system. The spike in US bonds yield has led to the fall of the 16th-largest bank in the US, Silicon Valley Bank (SVB). The bank had made huge investment in bonds and had to bear the brunt when the bond yields rose and prices fell. Indian banks have not faced such a situation.

The RBI increased the limit of the held-to-maturity category of the bank’s government bond holding from 19.5 per cent to 23 per cent. Banks are not required to mark to market the bonds kept in this category. Mark to market is an accounting practice whereby the value of an asset is based on the current market price and not the price at which it is bought.

In fact, even though there is no spillover effect of SVB’s failure in India, a proactive RBI started collecting every data from all banks twice daily in the aftermath of this – something it had done in 2020 after the near-collapse of Yes Bank Ltd.

Finally, we have done well on the currency front, too. One US dollar fetched Rs 75.54 in March 2020. The value of the rupee per dollar slipped to 83.29 on October 20, 2022 but has since risen to 82.18 (as on last Friday). The RBI has been intervening in the currency market – buying and selling dollars – to ease volatility.

On May 5, the World Health Organisation announced the end of the global health emergency triggered by the Covid pandemic. One must admit that India’s banking regulator has done fairly well to support the economy and protect the banking system in the past three years that have changed the ways of the world.

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