RBI Flagging OMO Bond Sales Steepens Curve

The INR government bond curve steepened in the wake of today’s RBI meeting, with 10-Year yields experiencing the largest swing higher in nearly 18 months. That benchmark cheapened by ~13bp, while 3s cheapened by ~7.5bp.

• The RBI’s hawkish hold, coupled with the touting of potential OMO bond sales by the Bank, as part of the liquidity management mechanism, provided the impetus for the sell off.
• Note that all but one MPC member favoured a continued focus on the withdrawal of accommodation” within the Bank’s policy stance.
• Governor Das emphasised that liquidity management is the preferred mechanism to manage upside inflation risks at present.
• Food inflation and energy prices present the obvious risks on that front, although crude oil has pulled away from ’23 highs in recent days.
• Das also stressed “only when we are convinced that inflation is at 4% or below on a durable basis, that may call for a rethink” re: the policy stance.
• First thoughts from the sell-side suggest that such liquidity management will provide a partial offset to the flows surrounding INR government bond JPM index inclusion, although Das was quick to note that index inclusion was not connected to OMO deliberations.