 "Central bank turns cautious on monetary tightening")
After some liquidity-tightening measures aimed at increasing borrowing costs, the Reserve Bank of India has turned cautious. Market experts said the central bank did not want interest rate to rise sharply as that could create more problems for the economy.
RBI on Thursday rejected bids that quoted higher yields for its Rs 12,000-crore bond sale programme, netting a paltry Rs 2,532 crore. It accepted bids worth Rs 777 crore and Rs 1,755 crore for 8.33 per cent 2026 and 8.97 per cent 2030 securities — at cut-off yields of 8.23 per cent and 8.54 per cent — respectively, as against secondary-market yields of 8.1 per cent and 8.37 per cent.
Banks’ treasury heads said there were several bids but RBI accepted only those close to the secondary-market rates. Despite receiving more than 113 and 76 bids for bonds with five- and 10-year tenures, RBI didn’t accept any bid.
Even on Wednesday, the central bank had rejected all bids received at the auction of 91- and 180-day treasury bills, worth Rs 12,000 crore.
“RBI didn’t want to give out any yield signal. It wants to use open-market operations (OMOs) as a pure liquidity-management tool. The message RBI wanted to send out was that it intended to suck out liquidity but not at the exorbitant level the market was demanding,” said N S Venkatesh, head (treasury), IDBI Bank.
Market players said chances of further OMOs would depend on RBI’s assessment of the liquidity situation.
“If the central bank thinks the measures it has taken are enough and liquidity is more or less in the comfort zone, it may not announce OMOs. If there is surplus liquidity, we can see further OMOs next week,” said Venkatesh.
According to bankers, the central bank definitely has a target for interest rate and doesn’t want rates to go up drastically. “RBI has achieved its immediate goal as short-term rates have gone up. However, it does not want rates to go too far,” said a treasury official of a foreign bank.
Though the marginal standing facility rate has been raised to 10.25 per cent, RBI does not want yields to go to that level. The yield on the 10-year benchmark bond, which shot up over 50 basis points after RBI announced its liquidity-tightening measures on Tuesday, came off below the eight-per-cent mark on Thursday.
According to bankers, the measures will provide some temporary stability to the rupee and more fundamental steps need to be taken to provide strength to the currency.
“We continue to believe that RBI will have to recoup forex reserves — rather than hike rates — to restore confidence in the rupee. After all, India’s balance of payments indicators have fallen behind BRIC levels. In our view, the rupee has been among the worst hit among BRIC and TIM currencies,” said Indranil Sen Gupta, Bank of America-Merrill Lynch’s India economist.
RBI on Thursday rejected bids that quoted higher yields for its Rs 12,000-crore bond sale programme, netting a paltry Rs 2,532 crore. It accepted bids worth Rs 777 crore and Rs 1,755 crore for 8.33 per cent 2026 and 8.97 per cent 2030 securities — at cut-off yields of 8.23 per cent and 8.54 per cent — respectively, as against secondary-market yields of 8.1 per cent and 8.37 per cent.
Banks’ treasury heads said there were several bids but RBI accepted only those close to the secondary-market rates. Despite receiving more than 113 and 76 bids for bonds with five- and 10-year tenures, RBI didn’t accept any bid.
Even on Wednesday, the central bank had rejected all bids received at the auction of 91- and 180-day treasury bills, worth Rs 12,000 crore.
“RBI didn’t want to give out any yield signal. It wants to use open-market operations (OMOs) as a pure liquidity-management tool. The message RBI wanted to send out was that it intended to suck out liquidity but not at the exorbitant level the market was demanding,” said N S Venkatesh, head (treasury), IDBI Bank.
Market players said chances of further OMOs would depend on RBI’s assessment of the liquidity situation.
“If the central bank thinks the measures it has taken are enough and liquidity is more or less in the comfort zone, it may not announce OMOs. If there is surplus liquidity, we can see further OMOs next week,” said Venkatesh.
According to bankers, the central bank definitely has a target for interest rate and doesn’t want rates to go up drastically. “RBI has achieved its immediate goal as short-term rates have gone up. However, it does not want rates to go too far,” said a treasury official of a foreign bank.
Though the marginal standing facility rate has been raised to 10.25 per cent, RBI does not want yields to go to that level. The yield on the 10-year benchmark bond, which shot up over 50 basis points after RBI announced its liquidity-tightening measures on Tuesday, came off below the eight-per-cent mark on Thursday.
According to bankers, the measures will provide some temporary stability to the rupee and more fundamental steps need to be taken to provide strength to the currency.
“We continue to believe that RBI will have to recoup forex reserves — rather than hike rates — to restore confidence in the rupee. After all, India’s balance of payments indicators have fallen behind BRIC levels. In our view, the rupee has been among the worst hit among BRIC and TIM currencies,” said Indranil Sen Gupta, Bank of America-Merrill Lynch’s India economist.