Govt bond yields inch up following RBI's revised liquidity norms

Government bond yields edged higher in the initial hours of trade on Tuesday following the Reserve Bank of India’s (RBI’s) revised liquidity norms, said dealers. The benchmark 10-year government bond yield rose to 6.34 per cent during the day, before recovering to settle flat at 6.32 per cent against the previous close.

 

“Initially, when the LCR draft guidelines were out, the LCR requirements were supposed to go up, but according to the final guidelines, the LCR requirements are going to come down. That means fewer requirements for HQLA, which is why the market reacted in the morning,” said the treasury head at a private bank. “It is a positive guideline for banks as they will have more funds for advances, but not so positive for G-sec,” he added.

 

 

The RBI has mandated a 2.5 per cent additional run-off factor for retail deposits linked to internet and mobile banking (IMB) facilities for commercial banks. This was stated in its final guidelines for computation of liquidity coverage ratio (LCR), compared to 5 per cent proposed in the draft norms issued in July 2024.

 

“The initial selling was by traders who are most likely to react to news, but we covered most of the losses by the end of the day because natural demand is there at these levels,” said a dealer at a state-owned bank.

 

The benchmark yield has softened by 26 basis points in April so far.

 

Government bond yields have been on a continuous decline since the RBI’s Monetary Policy Committee decision to cut the repo rate by 25 basis points. The rate-setting panel also changed the stance to accommodative from neutral. Additionally, the RBI has been infusing durable liquidity into the banking system via open market operation auctions and long-term variable rate repo auctions.