Yields on the benchmark government bond soared to a 14-month high on Wednesday, putting nearly R16 lakh crore worth of bonds with banks at risk of mark-to-market losses. The yield on the 10-year benchmark 7.16%, 2023 bond rose 32 basis points to hit 8.50% before closing at 8.42%. The market is readying for a further spike of 10-15 basis points — after the yield has jumped 100 bps in just three weeks — and is now reconciled to a status quo at the central bank’s monetary policy meeting on July 30.
Indeed, interest rates are already beginning to head up sharply. Short-term rates across tenures spiked in sympathy following the Reserve Bank of India’s (RBI) liquidity-tightening measures. The RBI’s attempts to rein in the rupee, however, helped the currency recover by 1.08% to 59.13.
Corporates are going to feel the pinch since the cost of commercial paper has risen by 10-15 bps in a single day. Moreover, banks will certainly pass on the increase in their cost of funds to borrowers.
“At least in the short run, you could see credit becoming costly,” said Sunil Pant, chief general manager, financial control, State Bank of India.
The 3-month AAA-rated commercial paper was quoting at 10.75-11.00% on Wednesday, a 25 bps rise over Tuesday’s levels. Yields on AAA-rated 10-year corporate bonds have risen by 10 bps and are up by a whopping 100 bps since mid-June. Issuances have halted with only two players hitting the market since the beginning of this month, dealers said.
Meanwhile, smaller banks, which have a greater dependence on bulk deposits, may soon need to tweak short-term deposits rates to attract cheaper money. “If the measures are not rolled back, it’s possible deposit rates will start to go up,” BA Prabhakar, chairman & managing director, Andhra Bank, said.
On Tuesday, the RBI capped banks’ borrowings from the repo tender at 0.5% of deposits of each individual bank instead of imposing a system-wide limit of R75,000 crore as it had done earlier. The central bank also said that banks must maintain 99% of their cash reserve ratio (CRR) requirements on a daily basis instead of the earlier 70%.
“It’s hard to call the market but the yield on the benchmark will now realign itself higher,” Manish Wadhawan, head of interest rates at HSBC, said. Treasury heads believe yields could rise further once banks start maintaining CRR at the higher levels from July 27.