The central bank received offers for ₹81,160 crore, less than half of the ₹2 lakh crore it intended to absorb from the market at a cut-off of 3.99%, almost at the 4% repo rate that it wants overnight rates to be. It has also announced another ₹2 lakh crore of seven-day VRRR on Tuesday as it goes all out to reduce liquidity in the banking system.
Traders dumped government bonds after the RBI announcement as the lower amount of funds with banks will mean less demand for securities. The short end of the yield curve fell more sharply as traders adjusted their position, noting the likely tighter liquidity in the immediate future.
“Today’s action by the RBI shows that contrary to its words, the persistence of inflation has definitely caused discomfort at Mint Street. The intent is clearly to suck out liquidity but it has caused unnecessary volatility in the market particularly in the short end, which could have been avoided,” said Naveen Singh, head, fixed income at ICICI Securities Primary Dealership.
Monday’s three-day VRRR is in contrast to RBI governor Shaktikanta Das’ comments post the monetary policy earlier this month to re-establish the 14-day VRRR auction as the main liquidity management operation. The change in RBI stance spooked traders and led to a spike in bond yields across tenures.
The yield on the five-year bond due in 2026 jumped to 5.80% from Friday’s close of 5.72% before closing at 5.77%. The impact was also seen in the benchmark 10-year bond due in 2031, which rose 6 bps to end at 6.44% from Friday’s close of 6.41% after opening lower at 6.38% on Monday.
RBI governor Shaktikanta Das had said the central bank will increase the amount it absorbs through VRRR in two auctions to ₹6.5 lakh crore on December 17 and further to ₹7.5 lakh crore on December 31, up from the ₹6 lakh crore it took from banks on December 3 and liquidity will be absorbed mainly through the auction route from January 2022 onwards. Monday’s and Tuesday’s auctions were not part of the plan.
Bankers say the central bank has clearly readjusted the interest rate floor at 4% and borrowing costs will now adjust higher accordingly.
“The system does not have as much excess liquidity as it had a few months ago. Banks who had more cash had kept it for disbursals at the quarter-end. The RBI move has impacted all calculations. But one thing is clear, rates are now set to increase,” said Sanjaya Wasan, head of treasury at Punjab National Bank.
The central bank has maintained its accommodative stance and promised its support for growth even as uncertainties due to the Omicron variant of Covid-19 remain. However core inflation – the non-food, non-fuel inflation component at a five-month high of 6.08% in November – has forced the RBI to rethink its unconditional support for growth.