The yield on benchmark bonds jumped sharply by 5 basis points on Friday, after the Reserve Bank of India (RBI) decided to discontinue the Government Securities Acquisition Programme (G-SAP) auction.
Governor Shaktikanta Das said the RBI would conduct a G-SAP auction whenever the liquidity conditions demanded, and continue to flexibly conduct other liquidity management operations, including Operation Twist and regular open market operations.
The 10-year benchmark 6.10%-2031 bond yield touched 6.3259% during the afternoon trade and ended at 6.3178%. The market time was extended twice by 30 minutes till 4:30 PM due to the late announcement of the result of a weekly bond auction. In the weekly bond auction, the RBI accepted all bids on bonds offered for sale. The cut-off was in line with the market expectations.
“Despite the partial steps initiated to lower support for bonds and the liquidity moderation measures, the RBI reiterated its readiness to act if the need arose. Today’s (October 8) steps are likely to lead to a further flattening in the yield curve as the short end reacts to a gradual liquidity withdrawal over time,” said Kumaresh Ramakrishnan, CIO – fixed income, PGIM Mutual Fund.
Last month, the government decided to borrow just over Rs 5 lakh crore in the second half, unchanged from what was announced at the start of the financial year. The projection includes requirements for release of the balance amount to states on back-to-back loan facilities in lieu of GST compensation.
The RBI injected Rs 2.37 lakh crore in the first six months of this financial year through open market operations (OMOs), which include G-SAP, as against Rs 3.1 lakh crore in entire FY21.
The RBI announced variable rate reverse repo (VRRR), its main instrument under the liquidity management framework, because the market’s appetite towards it is good. It will conduct a 14-day VRRR every fortnight and will enhance the amount by Rs 50,000 crore in every auction. The central bank is open to increasing the VRRR duration to 28-day if needed.
In Friday’s auction, the central bank accepted bids worth Rs 4 lakh crore at a 14-day VRRR auction of a cut-off yield of 3.99% and a weighted average rate of 3.65%. “The actions on liquidity is expected to bring up the overnight money market rates to above the current reverse repo rate of 3.35% and we think the RBI will then be open to adjusting the reverse repo rate to reduce the size of the corridor,” said Indranil Pan, chief economist, Yes Bank.
Market participants expect with the conduct of VRRR, the central bank kept the room open to hike the reverse repo rate in the December policy.