Government bond yields have inched slightly higher after the Reserve Bank of India (RBI) maintained its status quo on its policy rates this week, as widely anticipated by the market.
Wrapping up its three-day monetary policy committee (MPC) meeting on Thursday, the central bank unanimously decided to maintain the repo rate at 6.5 per cent, noting that the pace of inflation in the country has slowed markedly, even though there is further room for improvement.
The bond market remained somewhat muted this week, ahead of RBI’s policy update.
Says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP and former Senior Vice President of Debt Capital Market at ICICI Securities: “Even though the bond market was sure about the status quo policy rates on this policy too, the market participants were expecting some change in the policy stance viz. from withdrawal of accommodation to neutral stance. However, RBI’s MPC decided to retain their withdrawal of accommodation stance, keeping an ‘Arjuna Eye’ on inflation and their endeavour to bring it down to 4 per cent levels. Hence, the bond market sentiment, instead of becoming Dovish, has become slightly hawkish.”
For next week’s auction, the indicative yields on three-month, six-month, and 364-day treasury bills are 6.77 per cent, 6.87 per cent, and 6.86 per cent, respectively. T-bill yields have been gradually reducing from their striking highs early this year as RBI began to loosen its grip on the policy rates in April.
This time, 11 states are participating in the bond auction. At 7.44 per cent, Telangana is offering the highest interest rates for its state development loan (SDL), which matures on June 14, 2041.
Other participants include Tamil Nadu, Gujarat, Goa, Haryana, Andhra Pradesh, Uttar Pradesh, Nagaland, Maharashtra, Punjab, and Madhya Pradesh.
Of these states, Andhra Pradesh, Maharashtra, and Telangana are offering SDLs for two durations. Gujarat has the shortest duration SDL, maturing on June 14, 2028, with a 7.28 per cent interest rate.
The Bond Market
The long-term government security yields are expected to slowly increase due to the increased supply of long-duration bonds as per the borrowing calendar, besides the regular SDLs.
Besides, the RBI Governor, Shaktikanta Das, had mentioned draining out the excess liquidity from the banking system during his post-policy press conference.
Srinivasan says, "They have regularly announced VRRR (variable rate reverse repo auctions) to remove the excess liquidity. However, they have received little interest from banks to date compared to the targeted amount. We can expect the situation to change post-advance tax outflows.”
Suppose the excess liquidity in the banking system continues. In that case, Srinivasan says, “RBI may have to undergo many more VRRR options or think about other alternative tools, such as open market operations of government bonds or issuing more cash management bills or treasury bills, to drain out the excess liquidity.”
And so, the government bond yield curve could steepen slowly.