Trading in G-sec plunges as RBI tightens liquidity
Measures helped in stabilising rupee, resulted in yields rising high & traders in banks, insurance companies and fund houses losing appetite
 "Trading in G-sec plunges as RBI tightens liquidity")
Trading volumes in government securities took a hit after the Reserve Bank of India’s liquidity tightening earlier this month to arrest a weakening rupee.
Though the measures helped stabilise the rupee, it resulted in rising yields and a loss of appetite for these securities among traders in banks, insurance companies and fund houses. Data from the Clearing Corporation of India shows the daily average trading volume till July 15 was Rs 37,388 crore. This dropped sharply to Rs 16,871 crore after RBI started tightening liquidity.
The yield on the 10-year benchmark government bond 7.16 per cent ended at 8.19 per cent on Thursday, compared with Wednesday’s close of 8.42 per cent.
“The focus is now on rupee volatility and the central bank has been bringing out measures in quick succession, as they are concerned about the external factors on the rupee. After July 30, when the policy is announced, we will see some direction,” said Nirakar Pradhan, chief investment officer, Future Generali India Insurance.
Trading volumes dropped to Rs 9,218 crore on Wednesday after RBI further tightened liquidity by capping the daily Liquidity Adjustment Facility borrowing to half a per cent of each bank’s deposits. Besides, it said banks must keep a daily Cash Reserve Ratio balance of 99 per cent of the requirement.
“Trading volumes will be hovering around the current level. Only the most liquid securities will be actively traded. RBI might continue with these liquidity tightening measures for at least 30-40 days,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.
However, the RBI moves helped the rupee. It ended at 59.11 to a dollar on Thursday, compared with Wednesday’s close of 59.13. Since July 15, the rupee has strengthened by 79p.
Besides, as government bond yields started rising, it became attractive for foreign institutional investors (FIIs) to buy these at the current levels. Rising yields resulted in significant reduction in selloff by FIIs.
“If the rupee is stable at these levels, I believe this will give comfort to market players, which will then get reflected in the trading volumes of government bonds,” said Pradhan.
Though the measures helped stabilise the rupee, it resulted in rising yields and a loss of appetite for these securities among traders in banks, insurance companies and fund houses. Data from the Clearing Corporation of India shows the daily average trading volume till July 15 was Rs 37,388 crore. This dropped sharply to Rs 16,871 crore after RBI started tightening liquidity.
The yield on the 10-year benchmark government bond 7.16 per cent ended at 8.19 per cent on Thursday, compared with Wednesday’s close of 8.42 per cent.
“The focus is now on rupee volatility and the central bank has been bringing out measures in quick succession, as they are concerned about the external factors on the rupee. After July 30, when the policy is announced, we will see some direction,” said Nirakar Pradhan, chief investment officer, Future Generali India Insurance.
Trading volumes dropped to Rs 9,218 crore on Wednesday after RBI further tightened liquidity by capping the daily Liquidity Adjustment Facility borrowing to half a per cent of each bank’s deposits. Besides, it said banks must keep a daily Cash Reserve Ratio balance of 99 per cent of the requirement.
“Trading volumes will be hovering around the current level. Only the most liquid securities will be actively traded. RBI might continue with these liquidity tightening measures for at least 30-40 days,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman of the Fixed Income Money Market and Derivatives Association of India.
However, the RBI moves helped the rupee. It ended at 59.11 to a dollar on Thursday, compared with Wednesday’s close of 59.13. Since July 15, the rupee has strengthened by 79p.
Besides, as government bond yields started rising, it became attractive for foreign institutional investors (FIIs) to buy these at the current levels. Rising yields resulted in significant reduction in selloff by FIIs.
“If the rupee is stable at these levels, I believe this will give comfort to market players, which will then get reflected in the trading volumes of government bonds,” said Pradhan.
| RBI ACTIONS TO DEFEND THE RUPEE |
| 1998: Asian financial crisis Measures during Jan 1998
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| 2000: Asian crisis aftermath/ tech bubble Measures during July-August
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| 2008: Global financial crisis Measures during June-July
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| 2011-12: Aftermath of the US debt downgrade Measures during Sep-Dec
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| Present action |
July 8
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July 15
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July 22
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