Liquidity tightness to continue: PNB Gilts

PNB Gilts expects liquidity strain in the banking system to continue in the near term, according to a note to clients.

Liquidity tightness in the system has increased as the first phase of the cash reserve ratio hike by the Reserve Bank of India came into effect from Saturday.

"With the first phase of the CRR rate hike coming into effect, pressure on domestic liquidity conditions is expected to continue and market participants are expected to remain guarded," the note said.

The Reserve Bank had raised the CRR by 50 basis points to 5.5 per cent earlier this month in a bid to curb the rising credit exposure of banks to certain sectors such as housing and real estate.

The primary dealer major expects the situation to ease only once sufficient funds return into the system through government's expenditure and interest on special deposit scheme during January.

PNB Gilts expects yields on the 10-year benchmark paper to remain range-bound in near term due to the tight liquidity situation.