Yield on corporate bonds and state development loans (SDL) maturing in 10 years eased this week after the liquidity condition in the banking system improved and yield on government securities softened.
Since the start of this week, yield on these instruments fell by 5-10 basis points (bps), compared to last week. One basis point is one hundredth of a percentage point.
“The weighted average cut-off of the state government securities dipped to 7.42 percent in the auction held on August 29, from 7.48 percent in the last weekly auction, following the softening in the yield of Government of India Securities (G-Sec) across tenors,” ratings agency ICRA said in a report.
Mataprasad Pandey, Vice President of Arete Capital Service, said G-Sec bond yields have fallen in response to easing US Treasury yields.
The yield on these instruments fell, after it saw an upward movement of around 10-15 bps after the liquidity in the banking system tightened due to outflows on account of Incremental Cash Reserve Ratio (I-CRR) and Goods and Service Tax (GST) payments.
The liquidity fell into a deficit after these outflows for a few days and then it started improving.
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How much have rates eased?
The cut-off yield on 10-year SDL was set at 7.44 percent during an auction on August 29, from 7.49-7.50 percent in the last two auctions on August 22 and August 14, respectively.
In the first week of this month, the cut-off on 10-year SDL was at 7.44 percent.
Similarly, yield on corporate bonds maturing in 10 years in the secondary market also eased to 7.60-7.65 percent on August 29, from 7.70-7.75 percent in the last two weeks.
Improvement in liquidity
The liquidity in the banking system improved in the last few days after the reversal of the 14-day variable rate reverse repo and other inflows from redemption of bonds, dealers said.
Currently, liquidity in the banking system is in surplus of around Rs 41,283.57 crore, according to the Reserve Bank of India’s (RBI) money market operation data.
Prior to this, liquidity in the banking system slipped into deficit mode on August 22 for the first time this fiscal year to Rs 23,644.43 crore. This was on back of I-CRR and GST payment outflows.
Starting August 12, scheduled banks must maintain an I-CRR of 10 percent of their increase in NDTL between May 19 and July 28. This narrowed the surplus liquidity by over Rs 1.42 lakh crore as on August 13.
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Outlook
Money market dealers said yield on the short term as well as long term debt instruments may ease further in the coming days as liquidity is likely to improve substantially.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said in a report on August 28 that, going ahead, “we expect liquidity conditions to remain comfortably in surplus towards the end of the week amid month-end government spending and CIC (Currency in Circulation) payback”.
The report further said that there is expectation of inflows of Rs 1.10 lakh crore from government spending and Rs 52,827 crore of coupon inflows and redemptions of treasury bills and SDL.
The total outflows expected were over Rs 67,000 crore from the banking system, and this will keep short-term debt instruments rates lower.
“Higher liquidity will drag down rates of short-term debt by 5-10 bps more,” a dealer at a private bank said.
Read More: Yield on 10-year corporate bonds, SDL ease as liquidity conditions improve