The yields on the 10-year benchmark government bond touched a four-month high of 8.78 per cent on Tuesday as the Reserve Bank of India (RBI) conducted the first auction of the financial year amid tight liquidity conditions.
Of the notified Rs 18,000 crore raised by the government, Rs 1,100 crore devolved on primary dealers, the central bank said in a release.
“This is probably the impact of borrowing when liquidity deficit is so high. Traders are keeping themselves from investing as there are only two working days this week to cover reserve needs,” said a senior treasury official of a large public sector bank.
On Tuesday, yields on the 10-year benchmark government bond closed at 8.74 per cent, 17 basis points higher than the previous close. Yields jumped by 10-13 basis points as RBI announced a cut-off yield of 8.76 per cent on paper maturing in 2020, 8.84 per cent on the paper maturing in 2024, nine per cent on the paper maturing in 2030 and 9.06 per cent on the paper maturing in 2041. There was devolvement of Rs 319 crore in the eight-year security and Rs 875 crore in the 18-year security.
Banks borrowed Rs 1.3 lakh crore from RBI at a repo rate of 8.5 per cent while call money rates touched an intraday high of 9.5 per cent, reflecting tight liquidity conditions on Tuesday. Banks are also believed to have tapped the marginal standing facility window.
“Markets need to see some liquidity coming back to the system for yields to cool off,” said N S Venkatesh, head of treasury at IDBI Bank.
Liquidity is expected to improve from next fortnight with increase in government spending. Redemptions worth Rs 26,890 crore are lined up for Wednesday. Last week, the liquidity deficit worsened to about Rs 2 lakh crore, while banks borrowed from the marginal standing facility window each day. This is despite reduction of cash reserve ratio by 75 basis points and liquidity infusion through open market operations last month.
The government has pegged Rs 5.69 lakh crore of gross market borrowing this financial year as compared with Rs 5.1 lakh crore raised in the previous year. Of this, the government aims to raise Rs 3.7 lakh crore in the first six months itself. The government had raised Rs 2.5 lakh crore in the corresponding period of the last financial year.