BackBorrowing costs drop for govt, firms after RBI’s move
Assurance of steady infusion of liquidity has given bond traders enough comfort to bid aggressively at auctions
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Mumbai: Borrowing costs for the government as well as private companies have begun to fall in response to the Reserve Bank of India’s (RBI’s) decisive change in its liquidity stance. The assurance of a steady infusion of durable liquidity through either foreign exchange operations or purchase of government bonds has given bond traders enough comfort to bid aggressively at auctions.
At the auction of treasury bills on Wednesday, the cut-off yield for the 91-day and the 182-day bills was below 7% for the first time since November 2010. The cut-off yield that RBI set on 91-day treasury bills was 6.85%, 42 basis points (bps) lower than the cut-off at the previous auction on 30 March. On the 182-day bills, the cut-off was 6.93%, 24 bps down from the level at the previous auction on 23 March.
The government borrowed ₹ 9,000 crore through 91-day treasury bills and ₹ 6,000 crore through 182-day bills.
A basis point is one-hundredth of a percentage point.
Rates on commercial papers have also dropped. The rate on the three-month commercial paper fell below 8% to hit a near four-month low, according to data from Bloomberg.
“A 25 bps was more or less expected. But the liquidity measures are fairly positive. Systematically, liquidity will be added to the system and automatically, the short-end would perform," said Ashish Vaidya, head of trading and asset liability management at DBS Bank.
On Tuesday, RBI pared its repo rate by a quarter of a percentage point to 6.50% and announced that from now on, it would target a neutral durable liquidity situation instead of maintaining a deficit of 1% of deposits. The central bank also added that there would be a clear distinction between durable liquidity and short-term liquidity. This would mean that RBI would infuse a large amount of permanent liquidity through either bond purchases or by buying dollars.
“The liquidity that we infuse or take out will be the residual given our forex operations and our target growth in durable liquidity," said governor Raghuram Rajan in his interaction with the media on Tuesday.
Bankers have been complaining that the rising deficit has stymied their efforts to pass on the central bank’s policy rate cuts. Banks on an average borrowed ₹ 2 trillion daily from RBI’s various windows during February and March. Towards end of March, such borrowings surged to as much as ₹ 2.5 trillion, reflecting the liquidity crunch.
While short-term rates have crashed, yields on long-term government bonds have moved up in response to RBI’s measures as these were seen to be having a gradual impact rather than immediate relief. The benchmark 10-year bond yield is at 7.46%, up from 7.41% on Monday.
Nevertheless, bankers expect the 10-year yield to fall to 7.25% in the coming months as liquidity tightness begins to ease. In a separate release on Tuesday, the central bank said it would infuse up to ₹ 15,000 crore through bond purchases under open market operations on 7 April.
Bank of America Merrill Lynch expects the central bank to buy a whopping ₹ 1.8 trillion worth of bonds through open market operations during the current fiscal year.
“A lower risk-free 10-year (bond) enables lending rate cuts, supports recovery and reduces bank NPAs (non-performing assets). After today’s (Tuesday’s) RBI policy, we expect the 10-year (bond) to slip to 7.25% in six months from 7.5%," said the note put out by Bank of America Merrill Lynch.
However, not all are optimistic on a rally in bonds. Vaidya of DBS Bank points to the large supply of government paper lined up in fiscal 2017 and a possible increase in state government borrowings. The central government will kick off its ₹ 6 trillion borrowing from the market this week and states are scheduled to borrow ₹ 50,000-60,000 crore between April and June, according to the RBI.
“The only issue is that this (fall in yields) would be confined to the shorter end because the liquidity benefit is most at the short term. I expect the 10-year yield to be in the range of 7.35-7.45%," Vaidya said.
For corporates, too, the benefit through reduction in bond yields is expected to be small and further limited to only AAA-rated entities. “A lot of focus on the liquidity side has cheered up the market. Corporate bond yields could fall by a similar margin as government paper. But the benefit would be more to AAA rated papers. Low-rated papers would benefit less, as it will depend on risk perceptions and the sector to which the company belongs to. Investors are becoming quality conscious," said Ajay Manglunia, head of fixed income at Edelweiss Capital.
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