Yields on the 10-year benchmark government bonds fell by 45 basis points in less than a month, owing to liquidity infusion by the central bank through bond purchases and the recent buzz of a possible reduction in the cash reserve ratio (CRR) in the market. This was despite senior central bank officials reiterating their anti-inflationary stance.
The Reserve Bank of India (RBI) is scheduled to review the monetary policy on December 16, and a section of bond market participants has already factored in a 25-basis point reduction in the policy rates.
Yesterday, news agency Reuters had quoted RBI Deputy Governor Subir Gokarn as saying, "CRR is not just a liquidity toll but is also a monetary policy signal, and we are, as of now, still in a situation in which inflationary pressures are still high."
The CRR is the proportion of deposits banks need to set aside with the central bank as cash. Currently, it is six per cent.
On Thursday, yields on the 10-year benchmark government bond fell to 8.52 per cent, the lowest since September, after RBI Governor D Subbarao's comments that the central bank would take necessary steps to ease liquidity tightness. Yields had touched nine per cent last month. In the last one week, yield on the 10-year benchmark paper has fallen by 18 basis points.
Lower food inflation data and the third round of bond purchases by RBI also helped yields cool by eight basis points on Thursday, compared to the previous close.
Banks borrowed around Rs 87,000 crore from RBI's liquidity adjustment facility on Thursday, higher than RBI's comfort level of one per cent of banks’ net demand and time liabilities, which is Rs 60,000 crore. Repo borrowings have reduced from Rs 1-lakh crore levels at the start of the holiday-shortened week.
RBI has infused close to Rs 24,000 crore through bond purchases in open market operations (OMOs) in three consecutive weeks. "Better liquidity conditions because of successful OMOs, lower inflation data, and talks of a CRR cut have improved market sentiments," said DVSSV Prasad, managing director of Delhi-based PNB Gilts.
Liquidity is expected to worsen, as the deadline for advance tax payments draws closer. N S Venkatesh, head (treasury), IDBI Bank, said a cut of 25 basis points in the CRR would release Rs 45,000-50,000 crore into the system, and this would be helpful in making good of the advance tax outflows that are expected to be similar.
"A cut in the CRR would pull yields to 8.25-8.30 per cent levels if there is a change in policy stance from anti-inflationary to pro-growth," said T S Srinivasan, general manager (treasury), Indian Overseas Bank.
The price of current 10-year, 8.79 per cent bonds closed at Rs 101.78 on Thursday, which translates into a gain of about Rs 3 on the bond, compared to the close on November 14, when yields closed at 8.97 per cent. "Buying is happening across all papers, as markets expect yields to drop further," said Prasad.
