Bond yield rises 4 bps to 7.80%, banking system liquidity under pressure

The yield on the benchmark bond rose to 7.80% on Monday, up four basis points over Friday’s close of 7.76%. After rising to 8.23% in September, its highest level in four years, the yield fell 17 basis points in October, its first decline in three months.
Meanwhile, the Reserve Bank of India (RBI) continues to infuse liquidity – the central bank bought `86,000 crore ($11.8 billion) of bonds between May and October. It has planned to buy another `40,000 ($5.6 billion) crore worth of bonds this month. Liquidity has been drained by the central bank’s defence of the currency and the festive season, analysts at

Nomura wrote.
Money market experts said yields at the short end — across treasuries, commercial paper (CP) and certificates of deposits (CD) — have seen a slight decline in November after increasing 20-25 basis points in October.
One reason for the shortage of liquidity is that foreign portfolio investors (FPIs) have been pulling out money from the bond markets – withdrawals since April so far are $7.76 billion. However, in the first six sessions of November, FPIs have bought Indian debt worth $721.6 million in six trading sessions.
“Money market deficit will average `50,000 crore in the December quarter even after `90,000 crore of OMO and `10,000 crore cut in the net borrowings by government in H2FY19,” Indranil Sengupta, economist at Bank of America, wrote.
Banking system liquidity in recent weeks was pressured by the continued intervention in the forex market to stem the rupee depreciation and a mismatch in assets and liabilities of NBFCs.


Concerns also remain about relatively weak NBFCs being unable to roll over their commercial papers (CPs). Risk aversion has risen and lenders are funding only better-rated NBFCs and HFCs; for many NBFCs and HFCs, it is feared, are staring at an asset-liability mismatches resulting from borrowing short — from mutual funds — and lending long. With lenders becoming choosier now, corporate spreads are widening.
On the other hand, the cost of borrowing for corporates in the bond market has been rising in recent months as reflected in the increase in yields. Analysts at CARE Ratings observed there has been a notable increase in secondary markets yields of corporate bonds since November 2017.
They explained the average corporate bond yields — across maturities — rose to a near two-and-a-half-year high of 9.20% in October.
The rupee on Monday breached the 73 mark in intraday trade against the greenback before recovering at the close of the session to 72.89. Currency experts believe the immediate cause for the rupee decline is the increase in crude oil prices. Glob