Bond market had something to cheer about on Thursday after the Reserve Bank of India (RBI) announced measures to ease liquidity in the system. Yields on the benchmark paper, 7.80% note, due May 2020, fell by five basis points to 8.02% immediately after the RBI said it would conduct open arket operation (OMO) auctions for Rs 48,000 crore, in the next one month, and closed the session even lower at 7.95%.
The overnight call rate was slightly higher at 6.81% against 6.67% on the previous day and banks borrowed a near record Rs 1,43,935 crore from the RBI’s repo windows against Rs 1,02,530 crore on Wednesday. Close to Rs 50,000 crore has moved out of the system on account of advance tax payments.
HSBC head-interest rates global markets Manish Wadhawan said, ?The buy-back of Rs 48,000 crore will add to the liquidity but we need to watch out for supply of governemnt paper this month and in January. We expect the shortfall in the liquidity to go down to Rs 50,000 crore by mid-February from the current Rs 1 lakh crore.?
Nevertheless, the money markets which have been tight for the past two months, are likely to ease somewhat with rates on short-term paper coming off slightly. Says Mohan Shenoi, Treasurer, Kotak Mahindra Bank, ?Following the SLR cut and the announcement of OMOs, rates on certificate of deposits (CDs), across tenures, have dropped by nearly 10-15 basis points. We expect rates on CDs to further slide by 25-30 bps. While short term yields should come off, for yields on the longer term bonds, we’ll have to watch out for the fiscal policy in February.? Yields on three-month CDs fell to 9.02% on Thursday as against 9.05% on Wednesday while yields on the three-month CPs, were lower at 9.55% as against 9.62% on Wednesday. The cost of one-year interest-rate swaps, too dropped by 11 basis points to 6.81%.
Observes Joydeep Sen, SVP, Fixed Income (Advisory) at BNPP Wealth Management, ?The SLR leeway granted earlier was temporary and a permanent reduction in SLR is a remarkable move. While a CRR cut would have been more immediate in reducing the liquidity tightness, it was unlikely that the RBI would cut CRR in the face of government balances lying with it. Add to that the advance tax flows of December and it adds up to around Rs 1,50,000 crore of surplus funds.?
The bond buybacks by RBI, for Rs 12,000 crore each, will be conducted every week for the next four weeks– the first such auction will be conducted during the week ending December 24, 2010. The central bank has also reduced the Statutory Liquidity Ratio (SLR) of scheduled commercial banks (SCBs) from 25% of their net demand and time liabilities (NDTL) to 24%, with effect from 18 December, 2010.
The additional liquidity support under the LAF announced by the RBI on November 29, 2010 will now be available up to the extent of 1% instead of 2% of the NDTL of SCBs from December 18, 2010 to January 28, 2011.