New Delhi: India’s sovereign bond yields rose after the central bank announced its first step this year to drain cash from the banking system, as it seeks to push up overnight borrowing costs to its policy rate.
The 10-year benchmark yield rose as much 4 basis points to 7% after the Reserve Bank of India announced plans to withdraw liquidity of up to 2 trillion rupees ($21.6 billion) via a seven-day variable rate reverse repo auction — the first since December. Surplus cash with banks was at 4.3 trillion rupees as of Thursday, according to a Bloomberg Economics gauge.
The move comes after RBI Governor Sanjay Malhotra on Wednesday said the authority seeks to keep banks’ overnight borrowing costs as close as possible to the policy rate. It had permitted borrowing costs to drift lower to provide comfort to banks but that wasn’t a signal for a rate reduction, he said.
As overnight rates were falling well below the policy rate due to extreme liquidity overhang, the auction will suck out excess funds, said Gopal Tripathi, head of treasury at Jana Small Finance Bank. Banks will still be left with surplus cash of about 1.5 trillion rupees to 2 trillion rupees, he said.
“There can be some uptick in yields in the shorter end,” said Puneet Pal, head of fixed income at PGIM Asset Management in Mumbai. He expects the 10-year yield in a range of 6.75-7.10%.