Yields rise on CPI revision, liquidity normalisation move

By: |
August 07, 2021 3:00 AM

To absorb surplus liquidity, the RBI plans to conduct VRRR auctions worth Rs 4 lakh crore at September-end.

“The main reason for rising yields today was due to announcement of variable rate reverse repo (VRRR) auction and 60 bps increase in CPI inflation projection. It seems that we are getting near to reversal of very easy monetary policy,” said a fund manager with a mid-sized fund house.“The main reason for rising yields today was due to announcement of variable rate reverse repo (VRRR) auction and 60 bps increase in CPI inflation projection. It seems that we are getting near to reversal of very easy monetary policy,” said a fund manager with a mid-sized fund house.

The benchmark yield rose three basis points to close at 6.237% on Friday, after hitting an intra-day of 6.262%. While the Reserve Bank of India (RBI) left the repo rate unchanged at 4% at its bi-monthly monetary policy, it revised its inflation forecast for FY22 upwards to 5.7% and also announced more variable rate reverse repo auctions.

“The main reason for rising yields today was due to announcement of variable rate reverse repo (VRRR) auction and 60 bps increase in CPI inflation projection. It seems that we are getting near to reversal of very easy monetary policy,” said a fund manager with a mid-sized fund house.

To absorb surplus liquidity, the RBI plans to conduct VRRR auctions worth Rs 4 lakh crore at September-end.

“There has been a high appetite for VRRR, going by the bid-cover ratio,” governor Shaktikanta Das said in a statement. Currently, the banking system liquidity is estimated to be in surplus of around Rs 8 lakh crore. Market participants expect that the withdrawal of liquidity in the system will have a limited impact on the overnight rates in near term.

The much anticipated upward revision in the CPI Inflation projection is marginally lower than the central bank’s upper tolerance band of 6%. However, the projection for Q2 is 5.9%, close to the upper band, 5.3% in Q3 and 5.8% in Q4. The projection for the financial year 2022-23 is 5.1%.

The central bank announced two tranche of G-SAP 2.0 of Rs 25,000 crore each, to be conducted on August 12 and August 26. This is intended to anchor the yields on few papers and to keep all segments of the yield curve liquid.

Bond yields rose post the RBI announcement, but moderated after the central bank RBI rejected all bids at weekly bond auction. In Friday’s weekly bond auction, the RBI sold bonds worth Rs 3,750 crore and Rs 11,250 crore through sale of 4.26%-2023 and 6.76%-2061 bonds. On both bonds, the RBI accepted greenshoe option. However, 10-year bond was rejected by the central bank as investors were looking for better yields, dealers said.

The new 10-year benchmark 6.10%-2031 bond yield ended at 6.2345%, 3 basis points lower than its previous close on Thursday.

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