Bond yields, short-term rates to cool after CRR cut

Government bond yields might fall this week in response to the liquidity easing measure announced by the Reserve Bank of India (RBI). On Friday, RBI reduced the cash reserve ratio (CRR) by 75 bps to 4.75 per cent, effective from the new reporting fortnight. The move released Rs 48,000 crore of banks’ funds locked in CRR.

The yields on the 10-year benchmark government bond ended at 8.28 per cent on Friday. Yields are expected to ease, but caution ahead of the Mid-Quarter Monetary Policy Review and Union Budget announcement scheduled this week might limit the fall. “Yields may open lower at 8.23-8.25 per cent and then stay around those levels till the mid-term policy and budget announcements,” said N S Venkatesh, head of treasury, IDBI Bank.

RBI will release its mid-quarter assessment of the credit policy on Thursday and Finance Minister Pranab Mukherjee will present the Budget in Parliament on Friday. “We expect liquidity conditions to remain more or less at the current levels of Rs 1.3 lakh crore, as the advance tax outflows would offset the impact of the liquidity infusion through the recent cut in cash reserve ratio,” said Upasna Bhardwaj, economist, ING Vysya Bank.

Since the start of this month banks have been borrowing Rs 1.2-1.9 lakh crore daily from RBI’s repo window under the Liqudiity Adjustment Facility. The central bank said the liquidity deficit was due to both structural and frictional factors. RBI said it took into consideration the impact that advance tax outflows might have on liquidity. The deadline for making corporate advance tax payments is Thursday.

Traders said they would also watch out for pro-growth stance signals by RBI in the mid-quarter policy review.

Rates on short-term debt instruments like certificates of deposit (CDs) fell around 25 bps following the announcement of cut in CRR last week. “CD rates came off as investors wanted to take advantage of high rates before they fell further and some deals closed after the CRR cut was announced,” said Venkatesh.

Last week, tight liquidity conditions had driven up rates on CDs maturing in three months to levels above 11 per cent. Venkatesh expects rates to cool to 10.5-10.6 per cent levels this week.