Bond markets rallied after the Reserve Bank of India’s announcement of a 50-basis-points hike in the repo rate, but the yield on the benchmark bond closed Friday’s session at 7.3984%, up 5 basis points over the previous close.
Nevertheless, the yields have fallen five basis points in the current quarter, after rising by an aggregate of 140 basis points in the last four quarters. Most money market experts expect the yield on the benchmark to trade between 7.25% and 7.5% in the next couple of months. The government announced its borrowing calendar for H2FY23 on Thursday and said it would borrow Rs 10,000 crore less than planned – it will now borrow Rs 14.21 trillion in FY23. The markets believe that the government will not slip on its fiscal deficit targets despite higher expenses on fertiliser and other subsidies, and would save on revenue expenditure.
Suyash Choudhary, head, fixed income, HDFC, said he expects the repo rate to peak at 6.15 – 6.25% in this cycle with the final hike likely in the upcoming December policy. “This is higher than our earlier expectation of 6% and reflects changes to DM rate forecasts by a very sharp extent lately, something that we weren’t expecting earlier,” Choudhary said.
Meanwhile, the RBI reassured the markets there was no deficit of liquidity in the system. RBI governor Shaktikanta Das said surplus liquidity in the banking system had moderated to Rs 2.3 trillion during August-September 2022 (up to September 28) from Rs 3.8 trillion in June-July. Das said the liquidity situation is expected to ease, with the government starting to spend again. The government’s cash balances with the RBI are estimated at Rs 3.75 trillion.
“Furthermore, drawdown of excess cash reserve ratio (CRR) and excess statutory liquidity ratio (SLR) holdings of banks can also augment the system liquidity,” Das said.
“The RBI believes that the liquidity shortage is temporary. This should ease with the government spending coming back in the second half of the year,” a senior banker said. He added that the merging of 14-day and 28-day variable rate reverse repo auctions should help the liquidity situation to a small extent.