 "RBI's efforts to restrict 'tight liquidity' impact may not be successful")
The Reserve Bank of India's (RBI) efforts to restrict the impact of liquidity tightening measures to the shorter end of the yield curve may not be successful as economists expect some spillover effect even in long-term rates.
The short-term rates have been rising since the time RBI resorted to liquidity tightening measures. Tuesday the central bank resorted to further tightening due to which rates of short-term instruments like Certificate of Deposits (CDs) and Commercial Papers (CPs) breached the 11% mark. Besides that even call money rates and rates of Collateralized Borrowing and Lending Obligation (CBLO) touched double digit.
At 2:00PM the CBLO rates were quoting at 10.06%. On Saturday CBLO rates touched 13.50% in intra-day trades. While in the inter-bank money market call money rate was quoting at 10.20%. The weighted average call rate stood at 10.49% on Saturday.
Besides that banks which are currently reeling under tight liquidity resorted to borrowing under the Marginal Standing Facility (MSF) on Friday at a rate of 10.25%. Banks borrowed Rs 22,850 crore on Friday.
Earlier this month the MSF rate was increased by 200 basis points by RBI to 10.25% in order to tighten liquidity.
“Those banks which have a huge dependency on short-term funds, are very vulnerable. These banks at some point of time will have to raise their lending rates else they won't be able to maintain decent Net Interest Income (NII) growth. RBI is trying to restrict the impact of these liquidity tightening measures to the shorter end of the curve. But if these banks are forced to raise their lending and deposit rates, then some spillover will be there in long-term rates too,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
At 2:00 pm the yield on the 10-year benchmark bond 7.16% 2023 was trading at 8.14% compared with previous close of 8.16%.
“The liquidity tightening moves by RBI will be sustained till about December. The removal of these tightening measures will also be dependent upon the steps and comments that comes out from the US in terms of the quantitative easing programme. The government's borrowing programme for this fiscal also may not come down. Evaluation of all these things imply that the 10-year yield will move in the bracket of 8-8.25% and it is not likely to come down till December,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
Last Wednesday the yield on the 7.16% 2023 bond touched 8.50% in intra-day trades. Though the rising yield helped to attract flows from Foreign Institutional Investors (FIIs) in domestic debt, but it is set to hit the treasury portfolio of banks in the current quarter.
The short-term rates have been rising since the time RBI resorted to liquidity tightening measures. Tuesday the central bank resorted to further tightening due to which rates of short-term instruments like Certificate of Deposits (CDs) and Commercial Papers (CPs) breached the 11% mark. Besides that even call money rates and rates of Collateralized Borrowing and Lending Obligation (CBLO) touched double digit.
At 2:00PM the CBLO rates were quoting at 10.06%. On Saturday CBLO rates touched 13.50% in intra-day trades. While in the inter-bank money market call money rate was quoting at 10.20%. The weighted average call rate stood at 10.49% on Saturday.
Besides that banks which are currently reeling under tight liquidity resorted to borrowing under the Marginal Standing Facility (MSF) on Friday at a rate of 10.25%. Banks borrowed Rs 22,850 crore on Friday.
Earlier this month the MSF rate was increased by 200 basis points by RBI to 10.25% in order to tighten liquidity.
“Those banks which have a huge dependency on short-term funds, are very vulnerable. These banks at some point of time will have to raise their lending rates else they won't be able to maintain decent Net Interest Income (NII) growth. RBI is trying to restrict the impact of these liquidity tightening measures to the shorter end of the curve. But if these banks are forced to raise their lending and deposit rates, then some spillover will be there in long-term rates too,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
At 2:00 pm the yield on the 10-year benchmark bond 7.16% 2023 was trading at 8.14% compared with previous close of 8.16%.
“The liquidity tightening moves by RBI will be sustained till about December. The removal of these tightening measures will also be dependent upon the steps and comments that comes out from the US in terms of the quantitative easing programme. The government's borrowing programme for this fiscal also may not come down. Evaluation of all these things imply that the 10-year yield will move in the bracket of 8-8.25% and it is not likely to come down till December,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
Last Wednesday the yield on the 7.16% 2023 bond touched 8.50% in intra-day trades. Though the rising yield helped to attract flows from Foreign Institutional Investors (FIIs) in domestic debt, but it is set to hit the treasury portfolio of banks in the current quarter.