Bond yields slip below repo rate as banks step up play

MUMBAI: The benchmark bond yield has slipped below the policy rate after many years amid sloshing liquidity in the banking system triggered by the government's demonetisation move as banks, awash with cash, rushed to buy sovereign securities.
The benchmark bond yield on Friday dipped as low as 6.11%, lowest in about seven-and-half years, pushing prices up before recouping to end at 6.23 on Friday . Some banks booked profits, traders said.

“With abundant liquidity , banks are seen parking funds in government securities,“ said Piyush Wadhwa, head treasury , IDFC Bank. “Benchmark yield slipping below the policy rate suggests that market is expecting 25-50 basis points rate cuts in the next three-six months.“

“These rates are also reflective of the huge liquidity in the banking system because of demonetisation,“ he said.

RBI will announce its bi-monthly policy on December 7. This month alone, the benchmark yield dipped about 50 basis points, pushing prices up. It slipped below the repo rate, now at 6.25%, for two consecutive days.

On Friday , banks parked about a record `. 5.20 lakh crore excess li quidity with the central bank, dealers said. In the past two weeks, cash availability in the system has been rising.

The deluge of bank deposits and restrictions on withdrawals led to a glut in the interbank liquidity.

“Debt market is factoring more rate cuts in near term,“ said Soumyajit Niyogi, associate director, credit & market research group, India Ratings & Research. “For banks, the repo rate is not the right indicative for cost of investment in the current situation.Hence, bond yields are dipping fast, surpassing the policy rate.“

“The surge in bank deposits has actually opened up room for more bond investments by banks,“ he said.

India Ratings said the situation is likely to continue for a while as government attempts to normalise the situation. Volatility in money market will continue in the near term, until normalcy is restored in banking operations.

The short term borrowing rates too have tanked with the inter-bank call-money dipping as 80-90 basis points lower than the repo rate.

The collateralised borrowing and lending obligation, a short term credit market for banks and mutual funds, too plunged by almost similar quantum.

Moreover, RBI is expected to sterilise excessive liquidity through various modes and explore other avenues apart from the reverse repos, if the easy liquidity conditions persist.