India has asked its central bank to either buy back government bonds or conduct open market operations to cool yields that have hit their highest since 2019, as inflation risks push foreign investors to sell, a government source told Reuters on Monday.
The 10-year benchmark bond ended at 7.46%, after earlier reaching a high of 7.49%.
"The discussion with the RBI (Reserve Bank of India) is at an advanced stage as current yields are not at comfortable levels," the government official, with direct knowledge of the matter, said on condition of anonymity.
The official said government expects the RBI to conduct a switch operation, offering investors a chance to exchange their short-dated bonds for debt with a longer maturity, or to buy back government bonds within the next two weeks.
The official said RBI would take a decision on the timing and size of any bond purchases next week.
The RBI and the Finance Ministry did not immediately respond to messages seeking comment.
The request from the government could complicate the RBI's policy of withdrawing liquidity from the market, which marks a shift away from the ultra-loose monetary stance it took during the COVID-19 pandemic.
The RBI surprised markets last week by raising its key interest rate by 40 basis points to 4.40% to fight inflation - its first increase in nearly four years.
Annual retail inflation accelerated to almost 7% in March, its highest in 17 months and above the upper limit of the central bank's 2%-6% tolerance band for the third straight month.
The Centre also expects the RBI to intervene in the rupee market to contain volatility after the currency closed at its lowest level against the dollar on Monday, the government official said.
Foreign portfolio investors have sold $697 million of government securities since April 1 and $1.18 billion this year in total, according to traders.
"I have exited India completely for now," one trader with a foreign fund, who did not want to be named, told Reuters. He has sold $200 million of government securities and $70 million of equities.
"RBI needs to raise more rates to fight inflation."
He also said the RBI's intervention in the market was not sustainable as forex reserves were depleting, and that he would re-enter the market only after the central bank raises rates further and the rupee closes in toward 80 against the dollar.
India's foreign exchange reserves fell by $2.695 billion to $597.728 billion on April 29, according to RBI data, marking the eighth straight week of declines and the first time falling below $600 billion in a year.