 "Bond yields drop 6 bps to 6.75% on RBI's daily VRR auction assurance")
The yields on the 10-year government bond dropped 6 basis points (bps) to close the day at 6.75 per cent after the Reserve Bank of India (RBI) assured banks of conducting variable rate repo (VRR) auctions daily until further notice.
The short-term, three-year bond yield fell by 8 bps to 6.69 per cent.
In the first VRR auction on Thursday since its announcement on Wednesday, the RBI received bids worth Rs 30,760 crore against a notified amount of Rs 50,000 crore. Primary dealers emerged as the main participants, while banks showed limited participation, said market participants.
The RBI allocated the funds at a weighted average rate of 6.51 per cent.
On January 10, RBI conducted a VRR worth Rs 2.25 trillion, which was oversubscribed. “As a result, banks did not have the requirement on Thursday. Once the money goes back after 14 days, banks will need funds,” said the head of treasury at a public sector bank.
The maturity of government securities worth Rs 12,000 crore on Thursday eased liquidity pressures on banks, which further led to subdued demand. Market participants said that banks’ participation in the VRR auctions is expected to pick up after the goods and services tax (GST) outflow.
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“The banks had some inflow because of maturity, and liquidity has eased. On Thursday, primary dealers took most of the funds. Banks will participate more after GST outflows,” said a dealer at a primary dealership.
The RBI said on Wednesday it will conduct daily VRR auctions on all working days in Mumbai until further notice. The daily auctions are aimed at easing the current liquidity tightness in the banking system.
The liquidity deficit in the banking system has been over Rs 2 trillion in the past few days. According to the latest data, the liquidity in the banking system was in deficit of Rs 2.22 trillion on Wednesday.
The situation is expected to further exacerbate after the start of GST outflows later in the month.
Further, the government repurchased Rs 9,892 crore worth of government bonds through a buyback auction, which was conducted by the RBI on Thursday. The government had offered to repurchase Rs 30,000 crore worth of securities. The government had offered to buy back the 7.72 per cent 2025 bond maturing on May 25, the 5.22 per cent 2025 bond maturing on June 15, the 8.2 per cent 2025 bond maturing on September 24, the 5.15 per cent 2025 bond maturing on November 9, and the 7.59 per cent 2026 bond maturing on January 11.
“The RBI is taking measures to infuse liquidity, which the market has taken positively,” said a dealer at a state-owned bank. “The bonds which matured on Thursday were only scheduled inflows for the quarter; we are expecting more measures from the RBI,” he added.
By repurchasing its outstanding bonds from the market before they mature, the government reduces its liabilities and strengthens its fiscal position. The process involves using government funds to buy back these bonds, which are then typically retired, decreasing the total outstanding debt. This strategy allows the government to improve its debt profile by repurchasing higher-cost or shorter-term bonds.