Benchmark yields surge as RBI talks normalisation

MUMBAI: Yields on Indian bonds surged to their highest in a year and a half on the first trading day after the latest credit policy announcement last week, pointing to the challenges Mint Road is facing to simultaneously guide the economy toward normal liquidity without triggering an alarm on rates.

Investors believe that although there may be some correction in yields, they may not fall drastically any further. That would demand skilful handling of an economy beginning to clamber out of the Covid sinkhole by the central bank, which must simultaneously restrain inflation and nurture fragile growth.

The benchmark paper Monday yielded 6.35 per cent, the highest since April 17 last year, show Bloomberg data compiled by ETIG. In the past three trading sessions, the gauge climbed eight basis points, pulling prices down.

Bond prices and yields move in opposite directions. A basis point is 0.01 per cent.

“Yields are likely to rise as the central bank has decided to withdraw excess liquidity,” said Sandeep Bagla, CEO at Trust Mutual Fund. “It had been a significant buyer through the G-SAP program, which it has decided to stop now. Inflationary expectations are not coming down due to high crude oil and food prices. One cannot expect funding costs to remain low in the face of global inflation and tighter domestic liquidity conditions.”

Besides the benchmark, three top liquid papers maturing in the next 4 to 14 years yielded the most in about the past two months. Since last Thursday, the day before the RBI bi-monthly policy, yields in those sovereign securities rose by 3-7 basis points, show ETIG data.

The central bank has projected retail inflation at 4.5 per cent in the December quarter of FY22.

“RBI weekly auctions show that the central bank would not oblige any higher cost of liquidity surplus as it decides to cut easy money,” said a senior trader from a standalone bond house.

At a 14-day Variable Reverse Repo Rate (VRRR) auction last Friday, the cut-off rate yielded almost 4 per cent, on a par with the repo at which banks borrow money from the RBI. It was 3.60 per cent in the previous fortnight.

Before that on September 28, the 7-day VRRR cut-off yield came at 3.99 per cent.

“The incremental G Sec supply in auctions could lead to higher yields” Bagla said.

The central bank has, however, assured the market of liquidity support as and when needed.

“When the global crude oil prices are rising, local yields cannot remain under check,” said Ritesh Bhusari, deputy general manager – treasury at South Indian Bank. “Auction cut-offs are indicating that. Borrowers cannot expect any more record low funding rates. RBI is clearly on the path of liquidity normalisation.”

Global Brent crude oil prices soared nearly 15 per cent in the past one month to $84.34 a barrel.

The rupee dropped to a 15-month low Monday against the dollar amid rising global crude oil prices and US Fed tapering chances. The local unit lost about half a percent to close at 75.36 a dollar.

“Global crude prices and Fed Tapering collectively triggered a crash in the rupee’s value against the dollar,” said Anindya Banerjee, currency analyst at Kotak Securities.

The Reserve Bank of India may intervene to arrest the rupee’s fall if it crosses the 76 mark, dealers said.