The bond market shrugged off the surprise 40 basis points repo rate cut by the Reserve Bank of India (RBI) on Friday with the benchmark yield closing just 3 basis points down at 5.75%. Dealers say that lack of any much-anticipated measures by RBI to absorb excess supply of bonds via OMOs and exercise of green-shoe option by the government to raise more funds during the auction led to some amount of disappointment.
Ananth Narayan, professor-finance at SPJIMR, said the timing of the rate cut was a surprise, given that the scheduled monetary policy committee (MPC) meeting was just two weeks away. “Beyond the timing surprise, the market was likely expecting a 50 bps cut in June, so the extent of the cut — and the dissenting vote for a 25 bps cut — were perhaps mild disappointments. In any case, with market repos being dealt at 2.5%, the policy repo rate has less significance for bond markets now than before,” Narayan said.
Treps is a collateralised borrowing system where mostly private banks, foreign banks and primary dealers borrow short-term money using G-secs or treasury bills. With surplus liquidity available in the system, the Treps rate has fallen significantly in recent times. CCIL data shows Treps rates were quoting at a weighted average rate of 2.53%. This means market participants are borrowing money at much cheaper rates compared to the rate at which the central bank lends funds.
Sajjid Chinoy, chief India economist at JP Morgan told a television channel that the Treps rate is already trading between 25 and 100 basis points below the reverse repo rate based on the distribution of liquidity in the system. ‘There is only so much firepower that the RBI has. Given the quantum of uncertainty, you want to leave a little gunpowder for later which is why most of us thought a 40-50 basis points cut now will allow you to do more rate cuts down the line if the economic situation warrants,’ Chinoy said.
The yield on the old benchmark bonds—notes maturing in 2029—closed 7 basis points down at 5.96%. During Friday’s central government securities auction, the government borrowed Rs 8,000 crore more than the notified amount of Rs 30,000 crore by executing the green-shoe option of Rs 2,000 crore each in the four securities available for auction. Dealers say this was also a dampening factor for the bond market.
Siddharth Shah, head of treasury at STCI Primary Dealer said that there were expectations of RBI taking up some amount of additional borrowing, for example through OMOs, which didn’t materialise and this also led to the bond market giving up on the gains made during the day. ‘The market was spooked by the fact that RBI exercised green-shoe in all the papers auctioned since it results in pushing additional supply,’ Shah said. The cut-off yield on the new benchmark bonds that were auctioned on Friday stood at 5.74%.
Friday’s RBI data shows that the central bank hasn’t conducted any outright OMO purchases between May 11 and May 17. So far, the RBI has bought government securities, a good chunk of which is expected to be treasury bills, via open market operations (OMOs) outright purchases worth `1.2 lakh crore since the beginning of April this fiscal year.