 "Bond yields, short-term rates set to rise as RBI tightens liquidity further")
Bond yields and short-term rates would climb up while the rupee would strengthen, following measures to tighten liquidity further, announced by the Reserve Bank of India (RBI) late on Tuesday evening.
RBI announced the overall limit for access to liquidity adjustment facility by each individual bank, would be capped at 0.5 per cent of its own net demand and time liabilities, outstanding as on the last Friday of the second preceding fortnight. This would come into effect from Wednesday and would remain in force until further notice.
Besides, RBI said that effective from the first day of the next reporting fortnight (July 27), banks would be required to maintain a minimum daily cash reserve ratio balance of 99 per cent of the requirement.
“Due to Tuesday's measures, bond yields and short-term rates would rise on Wednesday. But these measures would help the rupee further,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank and chairman of Fixed Income Money Market and Derivatives Association of India.
On Tuesday, the rupee ended at Rs 59.8 a dollar, compared with the previous close of Rs 59.7. While the yield on the 10-year benchmark government bond 7.2 per cent 2023 ended at 8.2 per cent compared the with previous close of 8.1 per cent.
Last week, RBI had taken liquidity tightening measures due to which, the rupee stabilised and has been ending below the Rs 60 a dollar mark daily.
According to economists however, these measures to tighten liquidity and arrest the weakening rupee are not the ultimate solution.
“I see some strengthening of the rupee from the current levels. But the strengthening would happen because current account deficit would be lower, gold imports would be lower. If the government manages to pass some sentiment enhancing reforms, capital flows would come in. If the government manages Non-Resident Indian bonds or sovereign bonds, then there would be enough supply of dollars. These tightening measures of RBI are not the solution. They just provide temporary support to the rupee,” said D K Joshi, chief economist, CRISIL.
RBI announced the overall limit for access to liquidity adjustment facility by each individual bank, would be capped at 0.5 per cent of its own net demand and time liabilities, outstanding as on the last Friday of the second preceding fortnight. This would come into effect from Wednesday and would remain in force until further notice.
Besides, RBI said that effective from the first day of the next reporting fortnight (July 27), banks would be required to maintain a minimum daily cash reserve ratio balance of 99 per cent of the requirement.
“Due to Tuesday's measures, bond yields and short-term rates would rise on Wednesday. But these measures would help the rupee further,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank and chairman of Fixed Income Money Market and Derivatives Association of India.
On Tuesday, the rupee ended at Rs 59.8 a dollar, compared with the previous close of Rs 59.7. While the yield on the 10-year benchmark government bond 7.2 per cent 2023 ended at 8.2 per cent compared the with previous close of 8.1 per cent.
Last week, RBI had taken liquidity tightening measures due to which, the rupee stabilised and has been ending below the Rs 60 a dollar mark daily.
According to economists however, these measures to tighten liquidity and arrest the weakening rupee are not the ultimate solution.
“I see some strengthening of the rupee from the current levels. But the strengthening would happen because current account deficit would be lower, gold imports would be lower. If the government manages to pass some sentiment enhancing reforms, capital flows would come in. If the government manages Non-Resident Indian bonds or sovereign bonds, then there would be enough supply of dollars. These tightening measures of RBI are not the solution. They just provide temporary support to the rupee,” said D K Joshi, chief economist, CRISIL.