Yields in the short-term bond market — which had seen liquidity drying up of late — reduced by 150-200 bps on the back of the RBI’s Rs 3.74-trillion liquidity enhancement on Friday.
Further, market participants said measures taken by the RBI have led to a revival in trading activity in domestic bond markets, which had come to a halt because of risk aversion in the system.
Besides the rate cut, the RBI also said it would conduct auctions of targeted term repos of up to Rs 1 trillion. Liquidity availed under this window has to be deployed by banks in investment-grade corporate bonds, commercial papers, and non-convertible debentures.
Further, banks shall be required to acquire up to 50 per cent of their incremental holdings of eligible instruments from primary market issuances, and the remaining 50 per cent from the secondary market, including from MFs and non-banking financial companies.
According to industry participants, this will help the Rs 5-trillion liquid fund category, in which a high quantum of redemptions was expected as corporates sought to dip into their liquid investments given the disruptions in day-to-day operations. Last week, the MF industry had written to the RBI, seeking liquidity support.
Fund managers said shorter-duration schemes were well-positioned to benefit from the central bank’s liquidity enhancing measures.
“The short-duration segment should see positive gains as spreads will now come back to moderate levels, with liquidity coming back into the system. The longer-end of the yield curve may not see similar gains, as the government’s expansionary policies will lead to continued supply of papers in this segment,” said Kumaresh Ramakrishnan, chief investment officer (fixed income), PGIM India MF.
The shorter-end of the market had earlier seen a 150-200 bps spike in yields, amid selling by foreign institutional investors (FIIs).
According to market participants, FIIs sold Rs 8,000-10,000 crore of investments in this segment, while the buying appetite in domestic markets
has reduced amid the lockdown, impacting price visibility for traders and also hurting deal volumes. Overall selling by FIIs has crossed Rs 57,000 crore in March.
As a result, liquid schemes and other debt schemes took a hit on their returns. The former category, which has rarely seen negative returns, did so amid the liquidity squeeze. Other shorter duration categories were also impacted, as returns in the low-to-medium duration schemes were down 1-3 per cent.
Industry experts say the RBI measures have the potential to lower the overall cost of funding, and help the economy tide over present challenges.
“The targeted long-term repo operation facility will help remove pressure on short-term rate. All investment-grade bonds are covered. This means that all bonds above BBB-credit may avail of this facility, and more participation will come in the short-term rate,” said A Balasubramanian, managing director and chief executive officer of Birla Sun Life MF.
“Reduction in reverse repo means banks will have to cut rates further and will help in transmission of rates. Overall, the cost of borrowing for individuals and companies may drop sharply. Allowing delay in interest payment or principle repayment will ease pressure on banks and their non-performing assets, and consequently rating action,” he added.