The government bond yields have softened to their lowest levels in nearly three years on rising hopes of the Reserve Bank of India (RBI) cutting cash reserve ratio (CRR) on Friday to infuse liquidity into the system. On Wednesday, yields on 10-year G-Sec fell to 6.69% – the lowest since February 2022. The yield on five-year G-Sec also dropped to its lowest since April 2022.
Since Monday, 10-year bond yields have slipped by 6 basis points (bps). According to dealers, there was a significant action in both 10-year and 15-year papers as the market believes that there could be a CRR cut to the tune of 25-50 bps. This would release up to Rs 1.2 lakh crore into the system, leading to a further decline in shorter-duration bond yields.
The CRR is the percentage of a bank’s total deposits that it is required to maintain in liquid cash with the RBI as a reserve. The CRR percentage is determined by the RBI from time to time – it stands at 4.5% currently. Banks do not get any interest on this amount. If it is cut, this will be the first time in over four years.
The anticipation of a CRR cut led to a rise in banking stocks by 2-12%. The Nifty PSU Bank index rose 2.3%, helped by strong gains in public sector banks. UCO Bank, Indian Overseas Bank and Punjab & Sind Bank were among the top gainers, rising over 8% and 12%. Central Bank of India, Bank of Maharashtra, Indian Bank, Bank of India and Canara Bank rose 3-7%. The Nifty Bank index and Nifty Private Bank index were up 1% on Wednesday.
“Bank Nifty rose as traders are expecting a CRR cut on Friday. Also, the Lok Sabha has approved the Banking Laws (Amendment) Bill, 2024, which has given a boost to public sector banks,” said Deepak Jasani, head of retail research at HDFC Securities.
The calls for a CRR cut have gathered momentum after the second-quarter GDP hitting a seven-quarter low of 5.4%. Also adding to the woes is the consumer price index at a 14-month high of 6.2%. Fund managers believe that the RBI is likely to change both its growth and inflation projections in the Monetary Policy.
The Monetary Policy meeting, which began on Wednesday, will conclude on Friday with the six-member committee, led by governor Shaktikanta Das, announcing the outcome.
Some also believe that a cut in CRR alone would not lead to any sharp fall in yields. At the same time, if the MPC maintains the status quo, on both the liquidity and repo rate fronts, the yields may rebound sharply, prompting foreign investors to exit their positions. The yield on the 10-year benchmark may rebound to 6.80% in the aforesaid scenario.
“If nothing happens, it will hurt a lot of positioning in the market, leading to a sell-off,” a dealer said.
Market participants will observe the tone of the governor while detailing the outcome, and the inflation and growth projections.