RBI squeezes money markets to spur selloff in shorter bonds

The interbank name charge rose to as a lot as 3.50% as towards Friday’s weighted average of 3.18% whereas the yield on a five-year bond was up 10 basis factors after the Reserve Bank of India stated late Friday it plans to drain liquidity through a reverse repo operation.

The announcement is “a transparent sign from the central bank that it desires to slowly begin the method of exiting from the extraordinary accommodation that is still in place,” stated Kaushik Das, chief economist for India at Deutsche Bank AG. “The central bank desires to nudge the varied short-term rates of interest to converge to the reverse repo rate gradually.”

There has been growing consensus amongst traders that the RBI will begin draining extra money, as surging liquidity brought about money-market charges to drop beneath its interest-rate corridor final year, distorting asset pricing. Still, analysts had solely expected it to behave within the second quarter of 2021 after the central bank held its stance in December.

RBI’s announcement on Friday to retract ₹2 trillion ($27.3 billion) of banking funds via a 14-day reverse repo operation on Jan. 15 was a shock, stated analysts together with these at Citgroup Inc. The bank expects the yield curve to bear-flatten with forecasts for the 10-year yield to remain within the 5.75%-6% vary.

The yield on the 5.15% 2025 bond jumped to 5.21%, whereas the benchmark 10-year yield was up 4 basis factors to 5.92%. The one-month swap charge was eight basis factors higher on Monday.

Data in Focus

The RBI’s decision to withdraw excess money comes after inflation rose quicker than 6% in 11 of the 12 prior readings, hampering its potential to counter the pandemic-driven downturn with rate-cuts. However, information due Tuesday is forecast to show gains within the consumer price index slowing to 5% in December.

“It appears that the high frequency growth indicators are stabilizing,” Citi economists including Samiran Chakraborty wrote in a notice. “These developments could have provided RBI with the comfort to start policy normalization.”

Staggered approach

Cash in the banking system remains abundant at around ₹6.7 trillion, based on the Bloomberg Economics India Banking Liquidity Index. Expectations are for a gradual reduction as the economy recovers from a pandemic-induced slump. The RBI would also avoid draining cash in a hurry amid a record government borrowing.

“While it’s too early to get out of the accommodative stance, a staggered approach to normalizing policy will be adopted,” Rini Sen, an economist at Australia and New Zealand Banking Group Ltd. wrote in a note. ANZ now expects no rate cuts in the fiscal year ended March 2022, compared to its earlier call for a 50 basis factors reduction.