 "Bond yields to rise on incremental CRR")
The yields on government bonds might shoot up by 15-20 basis points in early trades in the bond market on Monday, as a reaction to the Reserve Bank of India (RBI)’s decision to jack up the cash reserve ratio (CRR) on incremental deposits to absorb surplus liquidity. About Rs 3.5 lakh crore came into bank coffers as deposits between September 16, and November 11, which will now need to be maintained as cash. On Saturday, RBI had said banks would have to maintain incremental CRR of 100% on deposits received in this period for the fortnight.
Bond dealers and bank executives said Rs 3.5 lakh crore is not a small sum and would impact the bond market, as the pace of bond buying by banks, which has accelerated after demonetisation, driving up bond prices, will reduce or decline. As a result, bond yields which have fallen below 6.25% are likely to rise by 20 bps, dealers say. The head of treasury with a large public sector bank said the decision would inject uncertainty, keeping yields up. The market would also look for cues about the next policy action and some cooling in sentiment is expected by the end of the day.
Government bond yields ended lower on Friday on reports that the limits on market stabilisation scheme would be raised and that were might be a rate cut in December. RBI is slated to review the monetary policy on December 7.
The underlying sentiment continues to remain supported amid ample liquidity. The yield on the benchmark 10-year government bond ended at 6.23 cent on Friday.
Last week, the yield on the benchmark bond dipped below RBI's policy repo rate, the rate at which the central bank lends money overnight to banks, of 6.25%. On November 8, benchmark yield ended at 6.8%. Thus, yields have come down by about 60 bps after the decision to abolish the legal tender status for Rs 500 and Rs 1,000 notes issued till November 8.
RBI had on Saturday said banks would have to maintain ‘incremental CRR of 100% on increase in deposits between September and November. This decision has been taken to absorb a part of the surplus liquidity. The incremental CRR is a temporary measure and will be reviewed on December 9 or even earlier, RBI said in its statement. There has been a surge in deposits after the note ban, relative to the expansion in bank credit, leading to large excess liquidity in the system. The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead. Bankers consider this move to be negative for lenders’ ability to manage interest rates and transmission. The gains from the flow of low-cost funds will be cancelled out, as money will remain idle with the banking system. This money can’t be used to lend or deploy in the market to earn returns.
If this ‘liquidity clampdown’ remains in place for long, it will shrink room to transmit gains to customers in the form of lower lending rates, said a treasury expert with private bank. The temporary hike in CRR does not apply to money that came after November 12. Flows were robust during the fortnight ended November 25 and banks will maintain CRR at regular rate (four% CRR). So, there will be enough money for deployment in the market as well as for lending. However, bankers expect the demand for credit to remain weak.