Banks and businesses rush into the bond market to lock in lower rates


In its October policy, the RBI announced a 14-day VRRR auction of Rs 6 lakh crore and had a 28-day VRRR auction option. The RBI’s monetary policy committee is due to meet on December 6, and the decision will be announced on December 8.

By Manish M. Suvarna

Corporate and bank fundraising in the bond market has risen sharply over the past two weeks as they consider locking in lower rates ahead of Reserve Bank of India (RBI) policy in December. The market expects the central bank to announce liquidity tightening measures that will increase the cost of borrowing in the coming days.

In addition, market participants also expect the RBI to increase the repo rate and make the repo rate an operational rate. Usually, most issuers sit on the sidelines and wait for the political decision, but this time the trend seems to be reversing. However, activity in the secondary corporate bond market is suspended as market participants are trading within a narrow range.

In the past two weeks, according to data compiled from bidding platforms BSE and NSE, businesses and banks have collectively raised Rs 36,747 crore, of which housing finance companies hold a major stake in Rs 14,190 crore. So far, banks and non-bank financial corporations (NBFCs) have raised Rs 9,092 crore and Rs 9,828 crore, respectively.

“Most of them are trying to lock in the lower interest rate currently available in the market as they expect liquidity to tighten given the RBI’s intentions to keep excess liquidity lower in the market. the banking system, which will ultimately impact the interest rate, “said Karan Gupta, director – financial institutions, India Ratings and Research.

The yield on corporate bonds through secondary market ratings trades between 5.35% and 5.45% on three-year papers, 5.62 to 5.75% on five-year papers and 6, 78 to 6.88% on 10-year papers.

Market participants expect the RBI to continue with its liquidity normalization tool, Variable Rate Repo Repo (VRRR) to reduce the liquidity that is currently in huge excess and boost the takeover rate. pension at 3.75%. The RBI is also withdrawing liquidity by selling sovereign securities worth Rs 1,435 crore over the past two weeks on the secondary market, which has sucked some of the system’s liquidity. Currently, the liquidity of the banking system is estimated at a surplus of approximately Rs 8.58 lakh crore.

In its October policy, the RBI announced a 14-day VRRR auction of Rs 6 lakh crore and had a 28-day VRRR auction option. The RBI’s monetary policy committee is due to meet on December 6, and the decision will be announced on December 8.

The rise in reverse repo rates is expected in two stages given the new variant of the virus. Usually the corridor spread between the repo and the reverse repo is 25 basis points, but it is now around 65 basis points. It was expanded during the pandemic to reduce the cost of borrowing. “We expect the reverse repo to be recalibrated to 3.75% through the February policy. We expect the VRRR’s downward trajectory to continue, ”said Sandeep Yadav, Head of Fixed Income, DSP Mutual Fund.

Apart from that, the brokerage firms and mutual funds have fixed the central bank to keep the repo rate unchanged and maintain an accommodative stance.

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