The Hindu Business Line : Bond yields harden on market stabilisation scheme revision

Market watch
RBI can now offload up to Rs 1,50,000 cr against earlier limit of Rs 1,10,000 cr.
Rs 1,35,000 cr is threshold at which it will review the ceiling in future.
Dealers feel short-term yields will be under pressure and may harden further.

Our Bureau

Mumbai, Aug. 9 The bond yields hardened on Thursday by nine basis points after the Reserve Bank of India announced, late on Wednesday, that it was arming itself with another Rs 40,000 crore under the Market Stabilisation Scheme (MSS) for intervention in the market.

The RBI can now offload up to Rs 1,50,000 crore as against the earlier limit of Rs 1,10,000 crore. Currently, only bonds worth Rs 98,970 crore is outstanding on this account. The RBI’s keenness to hike the limit has to be seen in the context of the rapid infusion of bonds under this account since January this year that has seen the figure shoot up from Rs 37,280 crore to the present value of Rs 98,970 crore.

“Through the increased ceiling on MSS, RBI will be able to suck out more cash from the system,” said the Head of Money Markets with a private bank.

Regulating surplus

The central bank’s constant intervention in the forex market to rein in the appreciation of rupee has injected a huge amount of the domestic resources into the system, leading to a situation of surplus cash in the system. Floatation of bonds under the MSS thus helps suck out such liquidity.

The latest initiative is seen by market players as part of a multi- pronged response to the phenomenon of surging forex flows.

After getting the commercial banks initially and later the domestic corporate sector, the RBI would now appear to have cast the burden of keeping the rupee value stable on the exchequer.

The banking system contributed by surrendering a higher portion of deposits (that doesn’t earn any returns) through a higher cash reserve ratio. The hike in CRR saw an outflow of about Rs 16,000 crore from the banking system.

Similarly, the corporates contributed by denying themselves access to cheaper overseas funds that curbs imposed earlier on ECBs meant. The intervention through MSS would mean higher interest outgo for the Government.

Impact on interest

Dealers, however, feel that this would have an impact on interest rates. “The short-term yields will be under pressure and they might harden further,” said Mr Ajay Mahajan, President, Financial Markets and Institutions, Yes Bank.

The news of freezing of three asset-backed securities funds of BNP Paribas has also created a negative sentiment in the market, affecting the yields on bond.

The Reserve Bank, under the existing arrangements, subject to variations in liquidity, announces every Friday the auctions under the MSS, covering the Treasury Bills and dated securities, if any, for the succeeding week. These arrangements would continue until further notice, said a press release from the RBI.

The threshold at which the ceiling will be reviewed in the future by the Reserve Bank of India is Rs 1,35,000 crore.