SDL, corporate bond yields ease 12-17 bps as liquidity, inflation improve

According to RBI data, the 10-year SDL yield fell to 7.32-7.33 percent on June 5 from 7.44-7.45 percent on May 2.

Yields on state development loans (SDL) and AAA-rated corporate bonds maturing in 10 years eased by 12-17 basis points (bps) over the past month as inflation and liquidity improved amid expectations the Reserve Bank of India would continue pausing its interest rate hikes, dealers said.

The reduction in yield on government securities also helped. One basis point is one-hundredth of a percentage point.

“The bond market was boosted majorly by two factors – expectation of the RBI to maintain status quo policy rates in the forthcoming policy and secondly, availability of abundant liquidity in the banking system,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincorp.

"Market is not seeing any rate hike by RBI, considering lower inflation and good liquidity, as fear of Mark-to-Market provisions have eased out, hence participants have been buying in fixed income securities," said Arun Bansal - Head Treasury, IDBI Bank.

What the data show

According to RBI data, the 10-year SDL yield fell to 7.32-7.33 percent on June 5 from 7.44-7.45 percent on May 2. The yield on AAA-rated corporate bonds dropped to 7.38-7.42 percent on June 5 from 7.55-7.60 percent on May 2.

The yield on the 10-year benchmark 7.26 percent bond yield declined to 6.9794 percent on June 5 from 7.0924 percent on May 2, as per data from the Clearing Corporation of India.

Lower inflation

India's headline retail inflation rate dropped sharply for the second month in a row, hitting an 18-month low of 4.70 percent in April. Prior to this, CPI inflation fell to 5.66 percent in March – below the central bank’s upper tolerance band of 6 percent for the first time – from 6.44 percent in February.

The lower inflation numbers had given the RBI a reasonable amount of confidence that monetary policy is on the right track, RBI governor Shaktikanta Das said recently.

Considering these comments and the data on the inflation and growth front, economists said the central bank will maintain the pause on increasing interest rates in June as well. The Monetary Policy Committee meeting ends on June 8.

Improving liquidity

Liquidity in the banking system improved sharply since the start of June due to a rise in government expenditure, the RBI’s foreign exchange purchases, and the rising impact of Rs 2,000 notes withdrawn from circulation, according to an IDFC First Bank report.

Liquidity, which was about Rs 56,000 crore in surplus, has increased to Rs 2.11 lakh crore, according to the RBI’s money market operation data.

IDFC First Bank said that at the start of FY24, liquidity conditions had tightened, averaging Rs 55,000 crore in the first half of May, resulting in weighted average call rates averaging 6.7 percent. Towards May end, conditions changed and system liquidity rose to Rs 1.1 lakh crore (average for May 26-June 2).

Kotak Mahindra Bank said in a report that persistent comfortable surplus liquidity conditions caused overnight rates to remain at about the standing deposit facility (SDF) rate for the past two weeks.

“We expect liquidity surplus to remain comfortable in the current range,” it said in the report.

To remove excess liquidity, the central bank conducted four back-to-back variable rate reverse repo (VRRR) auctions on four days. But the response of banks was muted at all four auctions.

The central bank conducted a Rs 75,000 crore VRRR auction on June 7, but banks parked only Rs 1,850 crore.

Srinivasan said even though the RBI may not be comfortable with excess liquidity, it may have to wait till outflows of advance tax payments.