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RBI squeezes money markets to spur sell-off in shorter bonds


INDIA'S key money market rates and yields on short-term debt rose after the central bank took its first small step towards unwinding emergency pandemic measures.

The weighted interbank call rate rose to 3.44 per cent as against its previous close of 3.18 per cent, while the yield on a five-year bond surged 13 basis points after the Reserve Bank of India said late on Friday that it plans to drain liquidity via a reverse repo operation.

The announcement is "a clear signal from the central bank that it wants to slowly start the process of exiting from the extraordinary accommodation that remains in place," said Kaushik Das, chief economist for India at Deutsche Bank. "The central bank wants to nudge the various short-term interest rates to converge to the reverse repo rate gradually."

There has been growing consensus among traders that the RBI will start draining excess cash, as surging liquidity caused money market rates to drop below the central bank's interest rate corridor last year, distorting asset pricing. Still, the central bank refrained from doing so in its December review, prompting traders to push back cash tightening bets to the second quarter of the year.

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RBI's announcement on Friday to retract two trillion rupees of banking funds via a 14-day reverse repo operation on Jan 15 caught many including Citgroup by surprise. The bank expects the yield curve to bear-flatten with forecasts for the 10-year yield to stay in the 5.75-6 per cent range.

The yield on the 5.15 per cent 2025 bond rose to 5.22 per cent, the benchmark 10-year yield was up five basis points to 5.92 per cent while one-month swap rate was eight basis points higher on Monday. Cash in the banking system remains abundant with 6.7 trillion rupees, according to the Bloomberg Economics India Banking Liquidity Index. BLOOMBERG

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