Bond yields saw steepest one-day rise in nearly 4 years and banks borrowed an unprecedented R2.16 lakh crore from Reserve Bank of India on Tuesday as the central bank prepared to tighten domestic liquidity to curb the fall in the Rupee.
The government bond yields surged by over
50 basis points on Tuesday, taking the yield on the 7.16% 2023 benchmark bond to an over two-year high of 8.10%.
?Tuesday?s move in the bond markets was partly a knee-jerk reaction and partly due to selling by mutual funds,? said NS Venkatesh, head of treasury at IDBI Bank. ?Yields may stabalise between 7.90-8% in the coming weeks,? he adds.
?The measure is for reigning in rupee weakness, but it is hitting other markets as well. Given that liquidity will be reduced, the yield curve has to adjust accordingly,? said a bond dealer at a public sector bank.
Dealers added mark-to-market losses could pile up because of the surge in yields. Bond yields had eased over 50 bps during April-June quarter, helping banks make big gains.
Meantime, rates in the call money markets ? which is used by corporations, financial institutions & mutual funds as a source of short term funds ? spiked to 9.20% from near 7% on Monday. Rates on three-month certificates of deposit were quoted a whopping 150 basis points higher, while one-month CD rates have hit 10%. The surge in short-term rates prompted most companies to stay away from raising funds through commercial papers and issuances were few, dealers said.
?We believe these measures have weakened sentiment in the rates market significantly. Our forecasts indicate that the liquidity deficit will likely persist, implying elevated overnight rates and funding costs for government bond investors,” said Standard Chartered Bank in a note.
Starting Wednesday, banks will only be able to access a maximum of R75,000 crore of 1% of Net Demand and Time Liabilities (NDTL) from the Reserve Bank of India?s liquidity adjustment facility (LAF) window. Ahead of that, banks rushed to access funds taking the borrowings for the day to a record high of R2.16 lakh crore compared with R926,000 crore on Monday.
The rush to access funds may have also partly been driven by the Reserve Bank of India?s plan to suck out R12,000 crore in liquidity through open market sales of government bonds on Thursday this week.
As a result of the tighter liquidity, most dealers said that money market rates are unlikely to cool off in the coming days.