Market players expect the yields on bonds to fall in the week ahead following a decline in the US Treasury yields. The Reserve Bank of India’s measures also seem to have helped bring some stability in the rupee.

“The 10-year yields may come down to 7.85 per cent. Also, the short-term rates are likely to remain high,” said Srinivasaraghavan, Executive Vice-President and Head-Treasury, Dhanlaxmi Bank.

On Friday, the yields on the benchmark 7.16 per cent government security, which matures in 2023, softened to 7.93 per cent from the previous close of 7.99 per cent. The bond price ended higher at Rs 94.74.

Also, the US treasury benchmark yields fell to near two-week low on Friday.

According to N.S. Venkatesh, Head-Treasury, IDBI Bank, “Market players were taking advantage of lower yields and funding their long-term positions in the currency market. This led to rupee depreciation”

RBI measures

In an attempt to stabilise the rupee, the Reserve Bank of India, earlier last week, capped daily borrowings by banks under the Liquidity Adjustment Facility (LAF) window to Rs 75,000 crore. Also, the borrowings over and above that under the Marginal Standing Facility would cost the banks 200 basis points (bps) more at 10.25 per cent from 8.25 per cent. The RBI also decided to conduct open market operation (OMO) by selling Rs 12,000 crore worth government securities to suck out liquidity from the system.

On Tuesday last, however, banks over borrowed under LAF to the extent of Rs 2.16 lakh crore. Market players quoted higher prices on the government securities on sale by the RBI on Thursday.

Hence, the RBI could only sell bonds worth Rs 2,532 crore in the secondary market from the original plan to sell Rs 12,000-crore bonds under the open market operation. This despite the fact that bids totalling Rs 24,279 crore were received against the bonds on offer, RBI data said.

High yields

Srinivasaraghavan believes the RBI rejection of the bids is a sign that it is not comfortable with the high yields quoted. “RBI doesn’t want to spike the yields and they are comfortable with the secondary market rates,” he said.

The liquidity squeeze in the money market has led to a clash between bond investors and the RBI. Market players got back to the RBI asking for higher yields (and thus offering lower prices for the bond on offer). The RBI rejected the bids, as the liquidity tightening measures are temporary, experts claim.

According to Venkatesh, the RBI eventually wants the market players to consider OMO as just a liquidity tool and not treat it as a signal to gauge the yield on government bonds. The RBI is trying to keep the short-term rates high.

“If RBI starts accepting higher yields at auctions, it might push up interest rates in the market permanently and also make the government’s borrowing programme costlier,” said a dealer on the condition of anonymity.

The government borrowing plan for the fiscal year stands at Rs 5.79 lakh crore, of which Rs 3.49 lakh crore is slated for the first-half ending September.

Policy Expectation

The RBI is likely to maintain a status quo in policy rate on July 30 after viewing the impact of the measures taken last week, treasury officials said.

“The policy stance is unlikely to be changed. Though, the RBI will highlight the concerns in the economy on the domestic and external front,” Venkatesh said.

Amid expectations of a CRR hike by some market players, he believes like most others that the measures taken last week are temporary. “Hence, a CRR hike is unwarranted at this point of time as CRR should be used to address structural liquidity concerns in the medium term and not short-term,” he added.

>beena.parmar@thehindu.co.in

>deepa.nair@thehindu.co.in

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