Short-term rates rise up as surplus liquidity narrows

Short-term rates rise up as surplus liquidity narrows

By Manish M Suvarna

Yields on short-term debt instruments such as commercial papers and treasury bills (T-bill) have risen in the last one week, after the surplus liquidity in the banking system got tightened due to variable rate reverse repo (VRRR) auctions and outflows of advance tax.

Demand from mutual funds and others investors also remained low as they were holding back some of their funds on expectations of rates rising further. Yields on commercial papers maturing in three months issued by non-banking finance companies rose between 6 and 9 basis points, and those of manufacturing companies increased by 12-18 basis points. While the cut-off yield on 91-day T-bills rose 4 basis points, 182-day and 364-day gilts jumped by 6 basis points and 3 basis points, respectively.

“Liquidity has tightened in the past few days due to VRRR auctions, advance tax payments and it will tighten further after GST outflows. All these are putting pressure on short-term rates, and hence we have seen they have increased around 20 bps,” said Marzban Irani, CIO – fixed income, LIC Mutual Fund.

The liquidity in the banking system narrowed last week following the higher amount of VRRR auctions conducted by the Reserve Bank of India (RBI). Along with this, outflows of advance tax also impacted liquidity surplus. According to market participants, nearly Rs 1 lakh crore was flushed out of the system for advance tax payments.

The RBI has increased the amounts under VRRR auctions and has said from January onwards, liquidity absorption would be undertaken mainly through the auction route. On Friday, it conducted a 14-day VRRR of Rs 6.50 lakh crore, which got a mild response from banks and they only parked just over Rs 3 lakh crore at a 3.99% cut-off. On Monday, it announced an unscheduled 3-day VRRR of Rs 2 lakh crore.

Market participants said the central bank through its move has indicated that it wants short-term rates to inch closer to the repo rate over the period of time and because of this rates on these instruments are getting adjusted. Liquidity is tightening, but some inflows are expected to come next week on account of government spending towards salaries and pensions that will increase liquidity surplus.

“Currently, the RBI is focusing more on liquidity calibration rather than any hike in reverse repo rate. This may be due to many uncertainties on the horizon including that due to the Omicron variant. Now if liquidity narrows, short-term rates will by default tend to inch closer to the repo rate and hence repo will become an operational rate,” said Mahendra Kumar Jajoo, chief investment officer of fixed income at Mirae Asset Investment Managers (India).

Dealers expect rates on short-term papers to rise further by 20-25 basis points as liquidity is expected to tighten further in coming days.

Check the source here –Source, Financial Express.