Government bond yields poised to rise as market reacts to RBI's rule change

The prevailing environment of rising bond yields, in part due to RBI's hawkish policy bias, has made banks unwilling to hold government bonds in excess of their liquidity requirements

The Reserve Bank of India (RBI) announced an important regulatory change in Wednesday’s monetary policy review, which reduces banks’ demand for government bonds by around 2% of aggregate deposits. We estimate that is equal to roughly Rs 2.3 trillion. While the market was expecting a move along these lines, government bond yields are likely to rise as the market reacts to the change over time, in our view.

At face value, the RBI eased the regulatory requirement for banks pertaining to liquidity. Digging deeper into the rules, the move is likely to accentuate concerns of oversupply and banks’ unwillingness to