Bonds erase gains as RBI signals tightening
2 min read . Updated: 28 Sep 2021, 07:56 PM IST
PremiumThe RBI withdrew liquidity through its 7-day variable rate reverse repo at 3.99%. That’s 57 basis points higher than the previous auction and just a shade lower than the benchmark policy rate of 4%.
Most Indian bonds gave up gains after the central bank drained cash from the banking system at a sharply higher rate, stoking fears the monetary authority is stepping up its policy normalization.
The central bank withdrew liquidity through its 7-day variable rate reverse repo at 3.99%, it said in a statement on Tuesday. That’s 57 basis points higher than the previous auction and just a shade lower than the benchmark policy rate of 4%. Yields rose across the curve after the results, wiping out earlier gains spurred by authorities sticking to the annual borrowing program.
The benchmark 10-year bond yield rose by two basis points to 6.23% on Tuesday after declining to 6.18% earlier. The yield on the 5.63% 2026 bond was at 5.67%, paring the day’s drop to one basis point from seven basis points.
This is the RBI acting proactively, and this is probably a pre-cursor to the policy where the RBI would hike the reverse repo rate," said Anoop Verma, a bond trader at DCB Bank Ltd. “International crude prices are also going up and this could create a problem with inflation, so they needed to suck out liquidity and ensure things don’t go out of hand."
Yields jumped after RBI set a sharply higher reverse repo cutoff
The monetary authority has been doing these auctions to modulate liquidity which rose to a record 10 trillion rupees earlier this month, and threatens to weigh on inflation and financial stability. The RBI drained 1.97 trillion rupees ($26.6 billion) through its 7-day reverse repo operation. Weighted average cutoff rate was 3.61%.
The RBI’s withdrawal of liquidity from the banking system has weighed on sovereign debt. The central bank has also started making its bond purchase program liquidity-neutral since last week by including an equivalent sell leg to the auctions.
Earlier in the day, bonds gained after the government refrained from adding to its near-record borrowing plan for the year, bringing some supply relief to the market battered by rising Treasury yields and oil prices.
The administration will adhere to its plan to borrow ₹12.05 trillion ($163 billion) in the year through March, the finance ministry said in a statement Monday.
The government plans to sell ₹5.03 trillion of bonds in the six months to March, compared with an earlier plan of ₹4.8 trillion. The marginal increase is due to the shortfall in the first half borrowing. The second-half borrowing will factor in compensating states for a revenue shortfall caused by the pandemic.
Finance Minister Nirmala Sitharaman had earlier indicated that the government may borrow about ₹1.6 trillion extra, which led to traders expecting higher sales for the second half.
