RBI fund transfer drove INR bond relief rally

The relief rally in Indian bonds on Tuesday was largely owing to the Reserve Bank's decision to transfer a record Rs 1.76 lakh crore dividend and surplus reserves to the government, a DBS report said.

The global financial services major, however, noted that interests in this paper is likely to be lukewarm ahead of the new 10Y issuance in September or October.

"INR bonds rallied on Tuesday, as the RBI plans to transfer dividends/ reserves well in excess of budgeted target and 2-3 times past years' proceeds. This will prove to be a timely fiscal windfall for the government," the DBS report said adding that the next focus will now be on the new 10Y issuance.

"Beyond short-term gyrations in the 10Y yields amid low volumes, interests in this paper is likely to be lukewarm ahead of the new 10Y issuance in September or October," noted Eugene Leow, Rates Strategist, and Radhika Rao, Economist, at DBS Group Research in the report.

Governor Shaktikanta Das-led RBI central board gave its nod for transferring to the government a sum of Rs 1,76,051 crore comprising Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), the apex bank said in a statement on Monday.

The receipts from the RBI will give a fillip to the government's efforts to boost the economy from a five-year low as well as meet the fiscal deficit target.

Regarding concerns as to how this windfall will be utilised, the report said that most likely it will be used to fund additional spending plans or plug a shortfall in budgeted tax revenues as this "will allow the government to compensate for any slowdown in direct and indirect collections and contain fiscal deterioration".

The report further said that besides RBI dividend contributions, bonds have drawn confidence from last week's sector-specific measures announced by the Indian government.

On August 23, the Indian government announced a raft of measures, including rollback of enhanced super-rich tax on foreign and domestic equity investors, exemption of startups from 'angel tax', a package to address distress in the auto sector and upfront infusion of Rs 70,000 crore to public sector banks, in efforts to boost economic growth from a five-year low.

To bolster consumption, the government also said that banks have decided to cut interest rates, a move that would lead to lower EMIs for home, auto and other loans.