Thread by @KirtanShahCFP

What is currently happening in the Debt markets?
- RBI announcing 14 days variable reverse repo
- Government talking about 12L cr of borrowing
- RBI announcing 20,000 cr of OMO

Lets demystify. ‘re-tweet’ & help us reach more investors
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There is a lot of liquidity in the system. You have heard many say it and even I wrote about it

https://twitter.com/KirtanShahCFP/status/1339759623679590401?s=20

(1/n)

Banks have liquidity but are cautious in lending. If banks don’t lend this liquidity, banks will be at a loss (notionally) as they will still have to pay the investors it borrowed from - FD, Savings Account, Current Account, RD etc. (2/n)

To reduce the loss & not take a lot of risk, banks were only lending it to RBI (Treasury Bills) & large corporates like RIL at as low as 3% for 3 months (called Commercial Papers or CP). RBI did not appreciate this as Reverse Repo Rate is at 3.35% (3/n)

Reverse repo is the rate at which Banks lend to RBI. So when banks give money to RBI, RBI pays 3.35%, where as when banks lend to RIL, RIL pays 3%, that’s not the right equation for the market. (4/n)

You would ask, if RBI is paying 3.35%, why are banks lending to RIL at 3%? Because RBI only takes a fixed amount from Banks under reverse repo and Banks have much more than that and hence the additional money goes to RIL (5/n)

2 correct this, RBI announced a 14 days variable reverse repo auction. Which means, RBI borrowed additional 2 Lakh cr 4m the banks at 0.20% higher than Reverse Repo @ 3.55% (RR–3.35%). This was the first sign when yields shot up in the market as RBI borrowed @ a higher rate (6/n)

Yields/Interest Rates going up is negative for the bond markets. Here is the explainer

https://twitter.com/KirtanShahCFP/status/1357145327204249601?s=20

(7/n)

Then came the budget, which said we would borrow 12L cr, a big negative 4 the debt markets. If government borrows 12L cr, it will give (sell) 12L cr worth of bonds 2 the market. Imagine selling 12L cr of an asset, the price will? DECREASE. Bonds fell/yields went up to 6.14% (8/n)

Now, if government wants to borrow & yield rises (bonds fell) they will have to borrow at expensive rates/yields. There comes RBI to rescue, 20,000 cr OMO (9/n)

OMO means open market operations. RBI will buy 20,000 cr worth of bonds from the market and give 20,000 cr of liquidity to the market. Again, if RBI buys 20,000 cr of bonds, bonds will go up (Yields will fall), that’s what happened and yields from 6.14% came down to 6.09% (10/n)

Government & RBI does not want yields to rise more because it will make governments borrowing expensive but its difficult to be able to control it, lets see how long can the RBI manage to keep yields low. (11/n)

Hope the thread added value :) Hit the 're-tweet' and help us reach more investors. We have written multiple similar educative threads on personal finance. You can find them as a pinned tweet on my profile or click the link below (**END**)

https://twitter.com/KirtanShahCFP/status/1337953717274832896?s=20