By Manish M. Suvarna
Yields on quick-term debt instruments such as treasury bills and industrial papers fell sharply more than the week as liquidity in the banking technique remained in surplus even immediately after the central bank carried out variable price reverse repo (VRRR) auction to absorb excess liquidity.
Since August 10, yields on industrial papers issued by NBFCs and manufacturing corporations maturing in 3 months fell by 10-20 basis points although these on treasury bills eased by 5-6 basis points across maturities. Similarly, the yields on G-Sec such as 5.63%-2026 and 5.15%-2025 and corporate bonds with much less than 5-year maturities eased by 10-15 basis points.
“Short-term money market rates are closely tracking the prevailing liquidity conditions. Liquidity surplus has increased substantially in the last few weeks due to RBI’s bond and FX purchases. This is putting downward pressure on money market rates,” mentioned Pankaj Pathak, fund manager, fixed revenue at Quantum Asset Management.
Short-term yields had been anticipated to rise immediately after the initially VRRR auction, but alternatively they eased additional for the reason that the liquidity nevertheless remained in a massive surplus. The surplus liquidity is playing a substantial function in dragging prices down on funds market place instruments and it was additional supported by reduce issuances in the market place.
Meanwhile, demand from mutual funds remained steady for the reason that they are witnessing powerful inflows into shorter-finish funds.
“Inflation and rising Covid cases forced investors to move towards short-end funds, where risk is low compared to longer-end funds,” a fund manager with a mid-sized fund property mentioned.
Fund homes have witnessed the highest inflows in funds maturing in six months, such as liquid and ultra-quick duration funds. However, medium to extended-term funds have seen a massive outflow, according to the Amfi information.
To eliminate excess liquidity from the technique, VRRR auctions have been announced by the central bank, of which the initially auction was held on August 13 and saw powerful demand from investors. In that auction, the central bank received bids worth more than Rs 4.50 lakh crore, although it accepted only Rs 2.50 lakh crore. The next auction is scheduled for August 27 for a notified quantity of Rs 3 lakh crore.
The central bank in its monetary policy has enhanced the quantity of VRRR auctions with a view that there is a greater appetite for this in terms of the bid-cover ratio. The RBI also warned that the enhanced VRRR auctions must not be misread as a reversal of the accommodative policy stance.
Dealers mentioned they did not see any uptick in yields immediately after the enhance in VRRR amounts by the central bank for the reason that outflows have been offset by the inflows on account of RBI bond purchases. In this quarter, the central bank has decided to obtain government securities worth Rs 1.2 lakh crore to help the market place.
But liquidity might lower in September due to anticipated VRRR, outflows of advance tax and an enhance in currency in circulation for the reason that of the festive season. This will cease prices from going downward and a marginal rise can be seen. Usually, currency in circulation increases ahead of the start out of the festive season.
“We may see some reduction in liquidity surplus from next month onwards due to tax outflows and seasonal pick-up in cash withdrawals, thus this downward trajectory in short-term yields may not continue,” Pathak mentioned.