Benchmark yields rose 5 basis points last week compared to the previous one pushed up by concerns on the liquidity front despite a slew of positive news.
The week commenced with the FY22 second-half borrowing calendar coming in at ₹5.03-lakh crore, which was well within the anticipated level. Then came the fiscal deficit number for April-August at 31 per cent of the Budget Estimate. The GST collections for September also came in at ₹1.17-lakh crore which is 23 per cent higher compared to the same month last fiscal.
However, yields continued to move higher as concerns on the liquidity front took precedence. For one, the cut-off on the seven-day variable rate reverse repo auction came in at 3.99 per cent last week. Compared to this, the cut-off on the 14-day variable rate reverse repo auction was at 3.6 per cent the week before.
This implies that the RBI is gradually getting comfortable paying a relatively higher rate in order to suck out the excessive liquidity sloshing around in the system.
Bond market participants are wary that the central bank will raise the variable rate reverse repo (VRRR) auction quantum as well as the tenors and also raise the fixed reverse repo rate in the upcoming Monetary Policy.
Ananth Narayan, Professor-Finance at SPJIMR, said a lot has happened over the past few weeks that wasn’t conducive for the bond market. “Commodity prices have shot up, there have been energy shortages around the world, mainly China and the UK, and the whole confusion about the US debt ceiling also added pressure on the US treasury yields.
“As we worry about cost-push and imported inflation, the concern is whether the RBI might start reducing G-SAP and raising overnight rates next week. I believe the central bank would not want to shock the markets. They may increase the VRRR and suck out some of the excess liquidity, but would also comfort the market that the liquidity would remain on the surplus side for much longer. I think it would be a surprise if the benchmark yield goes beyond 6.30 per cent in the short term,” Narayan said.
The 10-year US treasury yield also went up to 1.56 per cent last week before cooling to 1.46 per cent. With the benchmark yield hitting 6.24 per cent, bond traders expect the yield to find solace close to the 6.3 per cent level. All eyes are now on the Monetary Policy where the crucial thing to watch out would be any potential changes in the VRRR quantum, tenor as well as the fixed reverse repo rate.