Traders say even as yields could harden, hope of OMOs could lend some support in coming weeks
If the absence of a cut in policy rates was not bad enough, the bond market was hit by a cut of 100 basis points in the statutory liquidity ratio (SLR) by the Reserve Bank of India (RBI) on Tuesday.
The RBI slashed the portion of deposits that banks are required to invest in government bonds to 23% from 24% earlier. The cut will take effect from August 11. The SLR has been cut after a gap of two years.
The yield on the benchmark 10-year bond surged eight basis points after the policy outcome. Yields had already risen over 10 basis points over the last one week as expectations of rate cuts had receded.
The central bank kept policy rates and the cash reserve ratio (CRR) unchanged at its first quarter review of monetary policy on Tuesday. Most traders expect the 10-year bond to hit 8.5% in the next two months, given the incessant supply of bonds through auctions.
The government is scheduled to borrow R1,21,000 crore through bond auctions over the next eight weeks.While bond traders said that a devolvement at the auctions may not happen, the SLR cut will reduce demand and increase cutoff yields.
?I, however, don’t see devolvements in the upcoming G-sec auctions in view of the relatively lower levels of G-sec yields as well as the ensuing expectations of OMO auctions,? said Nirav Dalal, president & managing director of debt capital markets at YES Bank.
Dalal said that the 10-year yield could hit 8.50% and may move in the 8.25-8.50% band.
Most bank treasurers are unsure of the impact of the SLR cut on liquidity and even on bond yields as many hold bonds over and above the mandated limit.
?The SLR cut looks more cosmetic in nature. At the current juncture, it does not look effective. The system, as a whole, has excess SLR,? said Pradeep Madhav, managing director, STCI Primary Dealership. Madhav expects the 10-year yield to be in the 8.20-8.30% range despite the SLR cut as banks hold in excess of the regulatory requirement.
Some market participants hoped that even though liquidity conditions may not warrant open market operations, the central bank may announce OMOs given the surge in bond yields after the SLR cut. Moreover, the central bank needs to pump in cash into banks to prod them into lending to the private sector, dealers said.
?A mere cut in SLR will not push banks to lend to companies instead of the government,? said a senior bond trader at a public sector bank. Bond traders said that even as bond yields could harden, the hope of OMOs to come could lend some support in the coming weeks. Therefore, many do not expect a persistent rise in bond yields.
?OMOs would be needed because there is huge supply expected. Some pain from SLR cut could be absorbed by OMOs,? said P Mukherjee, head of treasury at Axis Bank.