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Informist, Friday, Jun. 6, 2025

By Vaishali Tyagi

MUMBAI – The Reserve Bank of India's move to effect a surprising 100-basis-point cut in the Cash Reserve Ratio pulled the 3-year and 5-year corporate bond yields down in the secondary market on Friday, dealers said. Yields on three-year and five-year corporate bonds fell significantly by 7-9 basis points, driven by a strong demand for short-term paper from mutual funds and foreign institutional investors, they added. However, the yields on 10-year corporate bonds slipped 2-3 bps, as the larger-than-expected policy rate cut was partly offset by the change in policy stance.

"The market started rallying (yields slightly up) when Governor Malhotra cut the repo rate, but it slumped after he changed the stance to neutral," a fund manager at a mid-sized mutual fund house said. "Yields fell particulary when governor announced the big cut of 100 bps in CRR after which mutual funds and foreign institutional investors bought short-term papers aggressively and other participants also got active in buying spree." 

The Reserve Bank of India cut the Cash Reserve Ratio by 100 basis points to 3% of banks' net, demand and time liabilites, Governor Sanjay Malhotra said while detailing the outcome of the Monetary Policy Committee's meeting on Friday. The cut, to carried out in four tranches of 25 basis points each, is expected to infuse liquidity to the tune of INR 2.5 trillion into the banking system, the governor said. The reduction in Cash Reserve Ratio will be carried out in four equal tranches with effect from the fortnights beginning Sept. 6, Oct. 4, Nov. 1 and Nov. 29, the governor said. "Besides providing durable liquidity, it will reduce the cost of funding of banks, thereby helping in monetary policy transmission to the credit market," Malhotra said. 

The cut in CRR was not the only surprise announcement made by the central bank--it unexpectedly lowered the policy repo rate by 50 basis points to 5.50%. In December, the regulator had lowered the Cash Reserve Ratio by 50 bps to 4.00% of net, demand and time liabilities in two equal tranches, infusing INR 1.16 trillion of liquidity into the system. 

Merchant bankers anticipate that mutual funds and other investors to capitalise on the excessive liquidity in the system by investing more in the debt market, which is likely to push bond yields further down. On that note, more portfolio churning is expected. "Traders will use the opportunity to take significant positions mostlty in shorter-tenure bonds in the secondary market, as new bond issuances in the primary market will offer lower returns," a dealer at a mid-sized brokerage firm said. "Existing higher-yielding papers are expected to gain traction from investors across all segments."

The RBI has already infused INR 9.5 trillion of liquidity into the banking system since January. Open market purchases of gilts, including through NDS-OM, injected durable liquidity amounting to INR 5.2 trillion. Additionally, term variable rate repo auctions and dollar/rupee buy-sell swaps injected liquidity amounting to INR 2.1 trillion and INR 2.2 trillion, respectively, during the same period. The central bank remains committed to provide the banking system with liquidy when required, Malhotra said. 

In the secondary market, deals aggregating INR 183.82 billion were recorded on the National Stock Exchange and BSE combined on Friday, up from INR 159.38 billion Thursday. Dealers said most of the participants from various segments were present in the market Friday. Mutual funds and FIIs bought heavily in shorter- and mid-year segment, while a few state-owned banks and pension funds sold bonds. There was very low activity in longer tenure segment, dealers added.

Papers issued by Rural Electrification Corp., Indian Railway Finance Corp., Power Finance Corp., Telangana State Industrial Infrastructure Corp., National Bank For Agriculture And Rural Development, Small Industries Development Bank of India, Power Grid Corp. of India were the most traded on exchanges.

In the primary market, activity was very dull as most of the participants remained focused on monetary policy decision and there after traded in secondary market. On Monday, state-owned entity, Power Finance Corp. will raise up to INR 70 billion through three bonds of different maturities. The company plans to raise up to INR 25 billion each through two bonds--one maturing on Jul. 15, 2027, and the other on Oct. 15, 2030. The company plans to raise up to INR 20 billion through zero coupon bonds maturing on Jul. 11, 2035. "PFC is likely to get fine levels on Monday, especially the short-term bond issuances, it will get significantly better placed (down) from any AAA-rated PSU bond," the dealer quoted above said. " However, I am slightly unsure about cut-off of PFC zero-coupon bond."

Merchant bankers expect primary market issuances to increase going forward, given the ample liquidity in the system following the 100 bps CRR cut and the recent rate cut. "Now that market participants have complete clarity on what rate bonds can be issued, we can expect a surge in primary market activity," the fund manager said. 

UDAY BONDS

In the secondary market, Ujwal DISCOM Assurance Yojana bonds aggregating INR 7.30 million were traded at a weighted average yield of 6.0901-6.3086%, data from the Reserve Bank of India's Negotiated Dealing System–Order Matching System showed Friday.

* INR 6.60 million of Uttar Pradesh's Jun. 2, 2028 bonds were dealt at a weighted average yield of 6.0901%

* INR 0.70 million of Rajasthan's Jun. 23, 2025 bonds were dealt at a weighted average yield of 6.3086%

BENCHMARK LEVELS FOR CORPORATE BONDS:

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Akul Nishant Akhoury

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