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The liquidity in the banking system improved to a one-month high surplus of Rs 2.23 trillion on Monday, according to the latest data by the Reserve Bank of India (RBI). This came about on the back of government spending.
“Government spending is the reason for the rise in liquidity. It might improve further but there will be some action by the RBI to manage liquidity,” said Indranil Pan, chief economist, YES Bank.
The RBI conducted two variable rate reverse repo auction on Tuesday to drain excess liquidity from the banking system. Banks parked a total of Rs 62,365 crore at the auctions, against notified amount of Rs 1.75 trillion.
The yield on the benchmark 10-year government bond settled at 6.87 per cent on Tuesday, against the previous close of 6.88 per cent. Government bonds were further aided by the influx of funds by foreign portfolio investors (FPIs) in the debt segment, said market participants. FPIs infused Rs 16,253 crore over the month.
The 10-year bond yield traded within a range of 6.85 per cent to 6.91 per cent in August, compared to the previous month's range of 6.91 per cent to 7.12 per cent. The 10-year yield dropped to 6.85 per cent during the month, marking its lowest level in over two years after indication of rate cuts in September by the US Federal Reserve.
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The benchmark yield softened by 6.6 basis points (bps) in August tracking the fall in the US Treasury yields, which dropped by 13 bps during the month. According to the CME Fedwatch tool, 69 per cent of investors expect the US rate-setting panel to cut key rates by 25 bps in September, while 31 per cent traders expect a 50 bps cut.
Back home, market participants expect the Monetary Policy Committee (MPC) to start cutting rates in December.
Longer end of the yield curve moderated, narrowing the yield spread between three-month and 30-year to 34 bps in August from 40 bps in July.
“The long end part of the curve has softened. The spread between three-month and 30-year has narrowed down to 34 bps in August from 40 bps in July, given the long end part of the curve has moderated. In August, cut-off yields for the 10-year paper of both state and Centre moderated, suggesting strong demand conditions. Even the cut-off yield for short-term paper eased,” said Jahnavi Prabhakar, economist at Bank of Baroda.
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