Concerned over rising bond yields, the government has asked the Reserve Bank of India (RBI) to either buy back government bonds or conduct open market operations (OMOs) to cool yields that have hit their highest since 2019, reported Mint quoting an official aware of the development.
“The discussion with the RBI is at an advanced stage as current yields are not at comfortable levels,” the government official said on the condition of anonymity, as per Mint.
The report further added that the government expects RBI to conduct a switch operation that will offer investors a chance to exchange their short-dated bonds with longer maturity ones, or to buy back government bonds within the next two weeks.
The 10-year benchmark bond ended at ₹93.69 on May 9, yielding 7.46 percent, after it had earlier reached a high of 7.49 percent during the day.
The bond market has been hot globally amid rate hikes. Bond yields are the return investors earn if they hold bonds until maturity. They are rising in India reacting to the hawkish policy, revision of inflation and GDP forecasts by the RBI and the prospects of the end of easy monetary policy.
Bond yields have a negative correlation with the equity market which means if bond yield goes up, the equity market will plunge.
Equity markets usually underperform when interest rates rise as the present value of future cash flows (meaning stock prices) can come down when interest rates rise. Even otherwise, if bond markets seem lucrative, some portion of incremental flows and even the existing equity funds can be diverted to bond markets, experts point out.
Meanwhile, the rupee fell to a fresh all-time low at 77.53 in the trade before ending 55 paise lower at 77.46 per dollar on May 9 as the greenback jumped to a fresh two-decade high.
US dollar has been gaining strength as the Federal Reserve has indicated aggressive hikes in rates to combat high inflation.