Bonds erase gains as RBI signals tightening

Most Indian bonds gave up their gains after the central bank drained liquidity from the banking system at a significantly higher rate, stoking fears that the monetary authority would speed up its policy normalization.

The central bank has withdrawn liquidity through its 3.99% 7-day floating rate reverse repo, it said in a statement on Tuesday. That’s 57 basis points higher than the previous auction and just a little lower than the benchmark benchmark rate of 4%. Yields rose across the curve after the results, erasing earlier gains boosted by the authorities’ continued annual borrowing program.

The yield on benchmark 10-year bonds rose two basis points to 6.23% on Tuesday after falling to 6.18% earlier. The 5.63% 2026 bond yield was 5.67%, reducing the day’s decline to one basis point from seven basis points.

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Shock signal

It’s the RBI that’s acting proactively, and it’s probably a forerunner of the policy that the RBI would increase the reverse repo rate, ”said Anoop Verma, bond trader at DCB Bank Ltd. “International crude prices are also rising and that could create an inflation problem, so they had to suck up cash and make sure things don’t get out of hand.”

Yields surged after RBI set significantly higher reverse repo threshold

The monetary authority conducted the auction to modulate liquidity, which reached a record 10,000 billion rupees at the start of the month, and threatens to weigh on inflation and financial stability. The RBI drained 1.97 trillion rupees ($ 26.6 billion) through its 7-day reverse repurchase transaction. The weighted average cutoff rate was 3.61%.

The RBI’s withdrawal of liquidity from the banking system weighed on sovereign debt. The central bank has also started making its bond buying program liquidity neutral since last week by including an equivalent selling leg at auction.

Earlier today, bonds gained after the government refrained from adding to its near-record borrowing plan for the year, bringing some supply-side relief to the market battered by rising yields in the Treasury and oil prices.

The administration will respect its borrowing plan ??12.05 trillion dollars ($ 163 billion) in the year to March, the finance ministry said in a statement on Monday.

The government plans to sell ??5.03 trillion bonds in the six months to March, compared to a previous plan of ??4.8 trillion. The marginal increase is due to insufficient borrowing in the first half of the year. The loan for the second half of the year will take into account compensation from the States for a shortfall caused by the pandemic.

Finance Minister Nirmala Sitharaman previously indicated that the government could borrow about ??An additional $ 1.6 trillion, which led traders to expect higher sales for the second half of the year.

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