The Hindu Business Line : ‘A flatter yield curve is in offing’

Chennai, July 31 Mr Devendra Nevgi, CEO & CIO, Quantum Asset Management Company Pvt Ltd, said: “Banks would probably not hike lending rates, since the loan growth had already slowed down. But if the excess liquidity contin ues, the banks might cut deposit rates to maintain their margins.”

He added, “The RBI’s sterilisation will keep the belly of the curve higher and the long-term rates are likely to be stable with most of the monetary variables such as credit growth and deposit growth within the RBI’s comfort zone. A flatter yield curve is in offing.”

Referring to the removal of the cap of Rs 3,000 crore on reverse repo auctions, Mr A. Balasubramanian, Chief Investment Officer, Birla Sun Life AMC, said: “Banks with surplus liquidity would get to gain by deploying the funds at 6 per cent under LAF (liquidity adjustment facility) mechanism thus earning higher return than that is prevailing today. With this move of RBI, one can assume easy overnight rate would get now realigned to LAF rate thus pushing up the short-term interest rate. This, in our view, holds the potential of putting a check on easy money flowing into unwanted or unwarranted assets thus creating unexpected upward price movement across different asset class.”

“Bond market was not pricing in CRR hike and yields got aligned at lower level on the back of sustained high liquidity in the system since May 2007. The RBI move of hiking the CRR and with forthcoming auctions to the extent of Rs 15,000 crore, it is logical to assume that liquidity would stop chasing yields thus pushing up the yield curve to some extent in both short-term as well as long-term.”

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