India’s 10-year government bond yield softens on expectation of RBI’s liquidity enhancement measures

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Yield of the benchmark 10-year Government Security (G-Sec) softened on Wednesday, with the spread between this paper and the overnight repo rate declining to a seven-year low, amid expectations that RBI will come up with liquidity easing measures to cool money market rates, which have tightened due to RBI’s intervention in the forex market.

The yield of the widely traded 6.79 per cent 2034 G-Sec is currently trading lower at 6.6851 per cent (previous closing yield: 6.71 per cent). In price terms, this paper is trading up about 18 paise.

The monetary policy committee’s (MPC) three-day meeting, which started today, will weigh the inflation-growth dynamics to take a call on the repo rate, which has been held steady since it was last upped in February 2023.

CARE Ratings Chief Economist Rajani Sinha and Senior Economist Sarbartho Mukherjee, in a note, said the RBI’s statement is expected to focus on liquidity management.

They assessed that systemic liquidity surplus averaged ₹0.1 lakh crore in the last week of November, down from an average of ₹1.5 lakh crore over the past couple of months. As a result, the weighted average call money rate has risen sharply, nearing the MSF (marginal standing facility) rate of 6.75 per cent and averaging 6.7 per cent at the end of November.

The rating agency economists observed that increased forex interventions, reflected in the decline in foreign exchange reserves and seasonal fluctuations in currency circulation, have reduced systemic liquidity. The government’s cash balances have been volatile too.

“The RBI will continue managing liquidity through both main and fine-tuning operations as necessary to maintain favourable money market conditions. However, observing how the RBI plans to manage liquidity moving forward will be crucial, especially if FPI selling persists,” they said.

“The RBI will ensure ample liquidity is available to support the credit demand. While there are discussions about CRR (cash reserve ratio) cuts, we believe that the RBI will likely inject liquidity through variable rate repo (VRR) and OMO (open market operation) purchases rather than more permanent injections of durable liquidity like CRR cuts. A pickup in government spending going ahead will support systemic liquidity,” added Sinha and Mukherjee.