Biggest India fund sees Budget arming central bank with liquidity tool

economictimes.indiatimes.com:

budget should arm the central bank with a time-tested tool to deal with a potential surge in bond flows on the nation’s entry into a key global index, according to the nation’s largest asset manager.

“Rather than selling long bonds from their book and distorting the market, you can issue short-term government securities,” Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds Management Ltd., said in an interview. “The market stabilization scheme is the right tool to have and at some point, at least in this budget, they should have that.”

MSS bonds are issued by the government outside the normal borrowing program to enable the Reserve Bank of India soak up liquidity. The proceeds are kept in a separate fund and not used for government spending. MSS bonds are in the spotlight as India is likely to see an increase in inflows after the inclusion of its bonds in JPMorgan Chase & Co.’s emerging-market index.

Radhakrishnan’s view goes against the majority. Most respondents in a Bloomberg survey, conducted ahead of the budget on July 23, don’t expect an announcement on MSS bonds. The RBI has been using variable rate reverse repo auctions — short-term parking of funds with the central bank — to draw out liquidity from banks for shorter periods and these may suffice for now, according to some market watchers.

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