Yields rise on CPI revision, liquidity normalization movement

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“The main reason for the surge in yields today is due to the announcement of a variable rate reverse repo auction (VRRR) and a 60bp increase in the inflation projection of the IPC. It looks like we are approaching the reversal of a very accommodative monetary policy, ”said a fund manager at a mid-sized fund company.

The benchmark yield rose three basis points to close at 6.237% on Friday, after hitting an intraday price of 6.262%. While the Reserve Bank of India (RBI) left the repo rate unchanged at 4% as part of its bimonthly monetary policy, it revised its FY22 inflation forecast upwards to 5.7 % and also announced more floating rate repo auctions.

“The main reason for the surge in yields today is due to the announcement of a variable rate reverse repo auction (VRRR) and a 60bp increase in the inflation projection of the IPC. It looks like we are approaching the reversal of a very accommodative monetary policy, ”said a fund manager at a mid-sized fund company.

To absorb the excess liquidity, the RBI plans to conduct VRRR auctions worth Rs 4 lakh crore at the end of September.

“There has been a great appetite for VRRR, based on the offer-to-cover ratio,” Governor Shaktikanta Das said in a statement. Currently, it is estimated that the liquidity of the banking system is in excess of around Rs 8 lakh crore. Market participants expect the withdrawal of liquidity from the system to have a limited impact on overnight rates in the short term.

The long-awaited upward revision to the CPI inflation projection is slightly below the central bank’s upper tolerance band of 6%. However, the projection for Q2 is 5.9%, close to the upper band, 5.3% in Q3 and 5.8% in Q4. The projection for fiscal year 2022-23 is 5.1%.

The central bank has announced two tranches of G-SAP 2.0 of Rs 25,000 crore each, which will be carried out on August 12 and 26. This aims to anchor yields on a few papers and keep all segments of the yield curve liquid.

Bond yields rose after the RBI announcement, but moderated after the RBI central bank rejected all bids at the weekly bond auctions. In Friday’s weekly bond auction, the RBI sold bonds worth Rs 3,750 crore and Rs 11,250 crore thanks to the 4.26% bond sale through 2023 and 6.76% to 2061. On both bonds, the RBI accepted the greenshoe option. However, the 10-year bond was rejected by the central bank as investors sought better yields, brokers said.

The new 6.10% -2031 10-year benchmark bond yield closed at 6.2345%, 3 basis points lower than its previous close on Thursday.

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