Yields on short-term debt instruments rose 15-30 basis points in the last two trading sessions after the Reserve Bank of India (RBI) introduced a standing deposit facility (SDF) as the floor for the liquidity adjustment facility. It restored the liquidity corridor to the pre-pandemic level of 50 basis points by fixing SDF at 3.75% and marginal standing facility at 4.25%.
Short-term debt instruments such as commercial papers yields are trading in the range of 4.15-4.55% across segments. Those on 91-day T-bill cut-off yield was at 3.9795%, 182-day at 4.4306%, and 364-day at 4.8240%. “Short-term rates are adjusting to the new monetary policy regime wherein the RBI will be more focused on controlling inflation and rolling back Covid-time rate cuts and liquidity. Much of the rate hikes are already discounted in the current bond yield levels,” said Pankaj Pathak, fund manager – fixed income, Quantum Mutual Fund.
Last week, the central bank kept policy rates unchanged and maintained an accommodative stance. It also announced SDF in the liquidity adjustment facility corridor with immediate effect, which replaced fixed-rate reverse repo as a floor. SDF will allow RBI to withdraw excess liquidity from the system without providing collateral in exchange.
Last week, RBI prioritised inflation over growth and liquidity withdrawal has impacted long- as well as short-term rates. Low liquidity in the banking system leaves maximum impact on short-term rates and its moves up sharply.
Market participants expect yields on short-term papers to rise further as soon as liquidity withdrawal starts. “We expect more rise in yields on money market instruments. It may rise by 50-70 basis points on short-term papers and 10-15 basis points on longer duration papers in the next couple of weeks,” said Ajay Manglunia, MD and head institutional fixed income at JM Financial.