Inflation bond auction cancelled

Effort to restrict impact of tight liquidity to short-term rates

The Reserve Bank of India (RBI) on Monday again tried to limit the impact of liquidity tightening measures on short-term rates by cancelling the inflation-indexed bonds auction. Though it is trying hard to restrict the impact of liquidity tightening measures to the shorter end of the yield curve, the efforts might not be successful, since economists expect some spillover effect even on long-term rates.

In the inflation-indexed bond auction for a notified amount of Rs 1,000 crore held on Monday, RBI cancelled all bids as traders were quoting very high yields. It was the auction of 1.44 per cent inflation-indexed bonds maturing in 2023. Short-term rates have been rising since RBI resorted to liquidity tightening.

Rates of short-term instruments like certificates of deposit and commercial paper breached the 11 per cent mark in the secondary market.

Besides, even call money rates and those of Collateralised Borrowing and Lending Obligation (CBLO) touched double-digits. The weighted average CBLO rate stood at 9.99 per cent on Monday compared with 10.31 per cent on Saturday. On Saturday, CBLO rates touched 13.50 per cent in intra-day trades.

In the inter-bank money market, the weighted average call money rate was 10.16 per cent today, compared with 9.08 per cent on Saturday.

Besides, banks, facing tight liquidity, resorted to borrowing under the Marginal Standing Facility on Saturday at the 10.25 per cent rate to which RBI had increased it from 8.25 per cent earlier this month.

“Those banks which have a huge dependency on short-term funds are very vulnerable. At some point of time, they will have to raise their lending rates; else, they won’t be able to maintain decent Net Interest Income growth. RBI is trying to restrict the impact of these liquidity tightening measures to the shorter end of the curve. But if these banks are forced to raise their lending and deposit rates, then some spillover will be there in long-term rates, too,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.

The 10-year benchmark bond 7.16 per cent 2023 ended at 8.13 per cent on Monday, compared with the previous close of 8.16 per cent.

“The liquidity tightening moves by RBI will be sustained till about December. The removal of these measures will also be dependent upon the steps and comments that come out from the US in terms of the quantitative easing programme. The government’s borrowing programme for this fiscal also might not come down. Evaluation of all these things imply the 10-year yield will move in a bracket of eight to 8.25 per cent and it is not likely to come down till December,” said Indranil Pan, chief economist, Kotak Mahindra Bank. Last Wednesday, the yield on the 7.16 per cent 2023 bond touched 8.50 per cent in intra-day trade. Though the rising yield helped to attract flows from foreign institutional investors in domestic debt, it is set to hit the treasury portfolio of banks in the current quarter.