The central bank further tightened the liquidity by announcing the sale of cash management bills of 28-day and 56-day tenure totalling R6,000 crore. The RBI also hiked the daily maintenance of the cash reserve ratio (CRR) to 99% of the 4% CRR requirement, from 70% earlier. As a result, all banks will have to maintain 99% of the CRR applicable to them from the first day of a reporting fortnight starting July 27.
For primary dealers, the total amount of funds available a standalone PD can borrow will be capped at 100% of the PDs net owned funds as per the latest audited balance sheet.
"The RBI has made liquidity management far more stringent. Cost of short-term credit will go up as a result of these measures. Commercial paper and certificate of deposit rates will rise in the short term and this may push up yields across the curve," said NS Venkatesh, head of treasury at IDBI Bank.
The move comes even as the rupee remained weak despite the RBI's earlier measures to quell speculation in the currency market by capping banks' borrowings from the repo window at R75,000 crore. Since the measures were announced, the rupee has gained less than 20 paise in value against the dollar and has only recovered 2.5% from its all-time low of 61.21 to the dollar. The impact of the new set of measures on the currency also remains uncertain, say bankers.
"They had to do something since the R75,000-crore cap was not working. Bond yields will go up after this," said Ashish Parthasarthy, head of treasury at HDFC Bank.
These moves are expected to put smaller banks at a great disadvantage, bankers said. They said that large banks do not need to borrow from the repo window but smaller banks rely more heavily on the tender. Foreign banks and smaller private and public sector banks will be hit hard as they run very tightly matched asset and liability positions.
By tying a bank's ability to borrow to the size of its deposit base, the RBI could skew the money markets as perennial borrowers from the call money market will turn more desperate, which could send call money rates spiking again, dealers said.
The requirement for banks to maintain CRR at 99% of the mandated requirement on a daily basis is also likely to make liquidity management tougher for banks.
"Earlier, banks had flexibility to maintain up to 70% of the requirement given that inflows and outflows can be unpredictable. Maintaining 99% on a daily basis will mean far more efficient liquidity management," said Venkatesh of IDBI Bank
Market participants said the move, apart from sending bond yields surging, may push up funding costs for corporates. The RBI's moves also take away any hope of an easing of interest rates in the near term despite growth remaining sluggish.
On the flip side, the higher yield could perhaps make Indian government bonds more attractive to foreign investors and draw in more foreign capital. Foreign institutional investors had lapped up investment limits in government bonds at a recent auction, but bond traders had said that such limits do not always turn into actual investment.