Money markets get a jolt as rates unchanged

Fitch downgrading India rating outlook from stable to negative also hits the currency

Rates in money markets were back to their earlier levels, as concerns over dwindling growth failed to convince the central bank to ease policy rates. Bond yields jumped by 12 basis points (bps) and rates on short-term debt papers were up by 25 bps, after the Reserve Bank of India maintained status quo on the repo rate and cash reserve ratio in its mid-quarter monetary policy review on Monday.

Yields on the 10-year benchmark government bond that had fallen to 8.05 per cent levels last week, closed at 8.17 per cent on Monday. The markets had priced in a rate cut of 25 bps after less-than-expected growth in industrial production for April. “RBI’s decision to maintain the policy status quo has disappointed the market. Though, given the latent inflationary pressure on the economy from the steep decline in the rupee, this position is understandable,” said Laxmi Iyer, head of fixed income and products at Kotak Mutual Fund.

Rates on short-term instruments such as certificates of deposit (CDs) and commercial papers also moved up by 25 bps on Monday. Banks issued CDs for three months at 9.2 per cent and six months at 9.52 per cent. Rates on overnight indexed swaps also moved up by a similar quantum, as markets unwound earlier expectations.

Markets will highly rely on bond purchases by the central bank under open market operations (OMOs). They could draw comfort from the central bank’s assurance that it would proactively manage liquidity. “Even as the liquidity situation converges to the comfort zone, the Reserve Bank will continue to use OMOs as and when warranted to contain liquidity pressures,” the central bank said in a statement. Moses Harding, head of asset-liabiilty committee and economic and market research, IndusInd Bank, said: “The system deficit is expected to be maintained at 1-1.5 per cent of net demand and time liabilities through OMO bond purchases.”

A bond dealer with a public sector bank said: “While there will be pressure from high supply, continuous OMOs by RBI will help cap the yields.”

RBI has so far infused close to Rs 70,000 crore this financial year.

To help banks advance more export-related credit, RBI increased the limit of refinance on such loans from 15 per cent to 50 per cent, which will potentially release liquidity of over Rs 30,000 crore. The move, though welcomed by bankers, is set to benefit only few sectors and came at a cost when compared to the release of liquidity via the cash reserve ratio. The facility is available at repo rate of eight per cent. “This window will be tapped by banks only when there is large variance between the repo rate and overnight MIBOR (Mumbai inter-bank offered rate),” said a senior treasury official at a private sector bank.

On Monday, the rupee fell 0.7 per cent to close at 55.92 against the dollar. It fell by 30 paise when RBI announced the status quo on key policy rates and fell further to touch 56 per dollar levels when Fitch Ratings announced it had cut its credit outlook for India to negative from stable.