RBI played a Perfect Santa !!!

Christmas is the time when everyone expects a surprise gift from Santa, and RBI didn’t disappoint the market, esp. bond market, after it announced 2 lacs OMO and $10B USDINR buy/sell swap, to infuse liquidity.

Announcement came as a real BIG surprise because it came in quick succession and double the size, given that RBI had announced 1 lac OMO and $5 bln FX swap just 18 days back. Market was expecting another OMO sometime in Jan, but this announcement just two days before Christmas is no less than a surprise gift.

This should come as a big relief to fixed income market as bonds have been under severe pressure over the last 7-10 days. Yields which traded 6.49 post RBI policy on Dec 5, made a high of 6.70 earlier today in the morning, before settling at 6.62.

The surprise gift from RBI should have soothing effect on equity as well but more important will be to see its impact on INR.

Going by the textbook, it should have negative impact on INR (more rupee liquidity), but looking at the OMO and FX swap size, it also gives headroom to RBI to intervene aggressively, if needed, without bothering about draining too much liquidity.

One of the reasons, rupee depreciated recently at a faster pace, because market knew that central bank hands are tied at back and would not be in position to sell aggressively to avoid draining the system liquidity.

Thankfully, last two instances of aggressive intervention in spot along with pulling the forward points up (6% in one month bucket, and almost 3.25% in one year, against fair range of 2.20% to 2.30%) puts all doubt on the intent, to rest.

For a short rupee speculator, nothing bites more than paying a higher carry, and more so when it is bumped up by design. Hopefully, the new swap will possibly also normalise the forward points gradually.

In nutshell, on the face of things, there could not have been a better Christmas gift than this for INR assets (bonds, equities and Rupee). Merry Christmas and a Happy New Year !!!