Utsav Saxena

The yield on the benchmark bond on Wednesday rose to 8.11%, up 12 basis points over the previous close of 7.99% on Monday. Bonds rallied on Monday after the RBI promised to infuse liquidity to the tune of Rs 36,000 crore in October through open market operations (OMO). Since April, the central bank has infused close to Rs 50,000 crore via OMOs, but with the busy season kicking in much more systemic liquidity is warranted, money market watchers believe.

One big reason for the shortage of liquidity is that Foreign Portfolio Investors (FPI) have been pulling out money from the bond markets, the withdrawals in 2018-19 so far are $11.8 billion. Yields have gone up sharply in the last few trading sessions. Money market experts said yields at the short end – across treasuries, commercial paper (CP) and certificates of deposits (CD) – have jumped by 20-25 basis points.

The benchmark yield has seen an increase of 35 basis points from the level of 7.76% seen in the middle of June. Bond markets are nervous as global crude oil prices remain elevated at over $84.70 per barrel, which together with the weakening currency – Rupee closed at an all time low of 73.34 against the dollar, would add to the inflation concerns.

“Money market deficit will average Rs 50,000 crore in the December quarter even after Rs 90,000 crore of OMO and Rs 10,000 crore cut in the net borrowings by government in H2FY19,” Indranil Sengupta, economist, Bank of America, wrote. Banking system liquidity in recent weeks has been pressured by the continued intervention in the forex market to stem the rupee depreciation, a mismatch in the assets and liabilities of NBFCs and the quarter end demand by the corporates.

While the bond markets got some positive news in the form of government pruning its net borrowings for 2018-19 by Rs 10,000 crore and gross borrowings by Rs 20,000 crore, there are concerns about whether the government will be able to stick to its fiscal deficit targets when indirect tax collections, so far, have been somewhat lower than expectations. Also, concerns remain about relatively weak NBFCs being unable to rollover their commercial paper.

The fairly strong linkages between mutual funds and NBFCs is another cause of worry, as MFs have invested large sums in short-term NBFC paper. Jayesh Mehta, MD & country treasurer, Bank of America, observed that while the stronger NBFCs will now be in a position to mop up more money since lenders will be willing to bet only on them, the weaker NBFCs could find it harder to access liquidity.

On the other hand, the cost of borrowings for corporates in the bond markets has been rising in recent months as reflected in the increase in yields. Analysts at CARE Ratings observed that there has been a notable increase in secondary markets yields of corporate bonds since November 2017. They explained the average corporate bond yields — across maturities — have risen to a near two-and-a-half-year high of 9.15% in September.



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