Owing to immediate policy rate hike by the RBI, government bond yields soared. The central bank is on the way to restore the repo rate at pre-covid level in 2020. On account of withdrawal of accommodative policy, RBI’s stance on monetary policy will turn to hawkish from current accommodative policy in coming days.
RBI kept rates unchanged but initiated steps to raise rates going forward. The focus is on removing excess liquidity from the system. G-sec yields will rise on expected rate hikes, lower liquidity, high g-sec supply and higher inflation. Corporate bond yields too will rise on rising government bond yields. Sensex, Nifty and INR will move on global risk conditions.
RBI sounded out higher inflation, global central banks removing accommodation, healthier growth outlook but kept its own policy easy with ultra-low rates and high liquidity. This forces money out of safe low yielding assets to higher risk and higher return assets.
RBI kept interest rates unchanged and maintained an accommodative stance on the back of lower than expected reading of CPI inflation in the last 2 months. However, with a liquidity overhang of Rs 13 trillion, RBI is focusing on calibrating the excess money and this will drive bond markets going forward.
RBI in its policy review on 6th August 2021 said it wants more trading in bonds but the market will not be allowed to determine yields. Bond traders who make markets have nothing to play for, as both direction and volatility is kept on a tight leash.
RBI is buying government bonds worth Rs 2.2 trillion in the first half of fiscal 2021-22 and is actively buying USD, adding more liquidity in the system. Corporate bonds, especially high yield bonds will see strong demand as investors search for yields
RBI Policy focus is on managing government borrowing at lower yields, believing that lower government bond yields benefit all and makes it a public good. Can this cause markets to take undue risks and lead to a financial crisis driven by debt? With RBI protecting G-sec yields, corporate bond yields that offer higher returns than G-secs will see good investor interest and there will be more issuers tapping the market for funds.
RBI is showing its concern on high liquidity, high fiscal deficit and rising equity prices by taking baby steps towards liquidity management. The CRR hike is the first step and more will follow in coming policy meets including repo rate hikes.
In normal markets, RBI hawkishness on inflation would have taken the 10-year government bond yield higher by a minimum of 25bps. RBI has revised its inflation forecast upwards and believes that price pressures are becoming broadbased. On top of higher inflation forecast, economic growth numbers too have been revised higher indication a post covid economic recovery.
Liquidity coverage ratio (LCR) norms for non-banking financial companies (NBFCs) will take effect on 1 December 2020. According to the central bank’s final guidelines on liquidity risk management framework for NBFCs and core investment companies, LCR, which refers to the share of high-quality liquid assets to be set aside to meet short-term obligations, will be introduced in stages.
Long duration bonds can be risky while short-duration bonds can protect investors from rising interest rates going forward. However, yields on short-duration bonds are extremely low and gives returns below inflation rate. Investors should search for yields smartly.
RBI has effectively sent out a bearish signal for the 10 year gsec and yields could rise to 7% from current levels of 6.70%. The benchmark 10 year gsec, the 6.79% 2027 gsec saw yields rise by 7bps post policy on hawkish signals by the RBI.
RBI policy will push up gsec yields with the 10 year gsec yield rising to 7% levels from current levels of 6.72%. High system liquidity will encourage search for yields along gsec and credit curves, though this will happen once the 10 year gsec stabilizes after a period of volatility.
RBI in its two day policy meet held on the 7th and 8th of February, released the decision of the MPC (Monetary Policy Committee) on the 8th of February and the verdict was policy rates being kept status quo and the policy stance turning neutral from accommodative.
Corporate Bonds will see fall in yields as markets buys into the spreads. Liquidity has eased considerably since the beginning of April Chart 1, overnight rates are trading at below the Repo Rate of 6.5% and corporate sentiment is improving on pick up in economic activity.
In the 2nd June 2015 RBI policy review, the Central Bank kept the Cash Reserve Ratio (CRR) of scheduled commercial banks unchanged at 4% of Net Demand and Time Liabilities (NDTL). RBI has kept CRR rate unchanged at 4% for the last 13 policy reviews.
Bond markets will not have any strong reason to pull down yields at the longer end of the government bond curve given that rate cut expectations will start firming up closer to June policy review (if data is positive for rate cuts).
RBI did not cut the repo rate as expected in its policy review today (3rd February 2015) but instead cut the SLR (Statutory Liquidity Ratio) by 50bps to enable banks to lend to the economy.
Equity investors should stay invested or make fresh investments in the markets with a minimum holding period of three years while fixed income investors should look to take advantage of expected fall in interest rates by investing directly in government and corporate bonds or by investing in bond funds for a period of 36 months and longer.
RBI cut the SLR (Statutory Liquidity Ratio) of banks by 50bps in its policy review on 5th of August 2014. Apart from this there was no change in policy rates on Repo and CRR (Cash Reserve Ratio) that were maintained at 8% and 4% respectively.
The whole market was expecting a 25 bps repo rate hike by the RBI in its policy review today but was (un) pleasantly surprised when the central bank refrained from a rate hike.
RBI has announced additional measures to squeeze system liquidity. Banks can now borrow only 0.5% of their NDTL (Net Demand and Time Liabilities) under the LAF (Liquidity Adjustment Facility) window. The limit of Rs 75,000 crores on repo stands withdrawn.
RBI curtailing liquidity to pull up the Indian Rupee (INR) has caused more pain than gain. The INR gained by one Rupee from levels of Rs 60.20 to the USD to Rs 59.20 while the ten year benchmark bond, the 7.16% 2023 bond price fell by Rs 3. In fact the bond market pain is not over yet while the INR is actually starting to fall again.
The Finance Minister, Prime Minister and the RBI Governor have collectively decided to take government bond yields higher in order to curb the volatility in the Indian Rupee (INR). RBI has announced measures to stem INR fall that had fallen to record lows of Rs 61.21 in intraday trading last week.
RBI kept benchmark policy rates unchanged in its policy review today. The guidance provided by the central bank suggest that apart from growth-inflation trajectory the balance of payment situation will be key to conducting monetary policy in the coming months.
The months of February and March are typically tight liquidity months for the system. Demand for funds goes up across the system as banks; corporates and the government look to balance their books for the fiscal year end.
RBI uses central bank language in its monetary policy communication. The RBI communicates its policy to bankers, economists, analysts, bond traders and fund managers and hence it does not require to bring down communication to the level of a non financial person.
RBI is widely expected to cut the repo rate by 25bps in its policy review on the 29th of January 2013. The rate cut will be the first in calendar 2013 and the second in nine months after its last rate cut in the April 2012 policy where it cut rates by 50bps.