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Informist, Tuesday, Jun. 10, 2025

By Sachi Pandey

MUMBAI – Yields on short-term debt instruments rose by 5 basis points Tuesday, extending Monday's sharp increase, as the market continues to price in the Reserve Bank of India's shift in monetary policy stance to 'neutral' from 'accommodative'.

On Monday, yields had already surged by 10–15 bps after the RBI unexpectedly cut the policy repo rate by 50 bps to 5.50% and simultaneously signalled a pause in the easing cycle by changing its stance. The central bank also cut the cash reserve ratio for banks by 100 bps to 3.00% of net demand and time liabilities, in four tranches. These moves, taken together, marked a front-loading of policy easing.

Although the repo rate cut was more aggressive than expected, the stance change carried stronger weight for the short-term market. A shift to 'neutral' suggests no further rate cuts, and that the central bank may wait and watch before acting again. "Short-term yields are directly influenced by RBI's stance," a fund manager at a mid-sized mutual fund said. "With the stance becoming neutral, it sends a message that the rate-cutting cycle may be over for now. That changes how we price liquidity and rates for the next year or two. That's why short-term yields rose."

Indicative rates on three-month papers issued by non-bank finance companies rose to 6.15–6.35% from 6.10–6.30% on Monday. Similar-tenor papers issued by manufacturing companies traded at 5.87–6.07%, up from 5.83–6.03%. Meanwhile, rates on three-month certificates of deposit by banks held steady at 5.75–5.95%.

The one-year segment saw even sharper moves. Rates on such instruments rose by as much as 15 bps on Tuesday, dealers said, as issuers rushed to lock in funds amid growing expectations that rates could remain volatile and increase further. "Issuers are booking one-year paper for March, fearing increase in rates ahead," a dealer at a mid-sized brokerage firm said. 

Meanwhile, fundraising remained lower Tuesday due to elevated rates. Companies raised INR 12.50 billion, down from INR 16.75 billion on Monday. Larsen & Toubro was the largest borrower, raising INR 7 billion through papers maturing in less than a month at 5.70%. Export-Import Bank of India tapped the market with a one-year CD issuance, raising INR 20 billion at 6.23%. Apart from EXIM Bank, only HDFC Bank was active in the CD market, raising INR 8 billion through three-month papers.

On the liquidity end, market participants continue to have positive outlook despite RBI discontinuing its daily variable rate repo auctions starting Wednesday. RBI conducted the final INR 250 billion daily VRR operation on Tuesday. Market participants said the move was widely expected and unlikely to disrupt liquidity or short-term rates.

"I don't think stopping the daily VRR will impact liquidity," the fund manager quoted above said. "We're sitting on surplus liquidity, and I don't think there will be shortage of liquidity in near future." The central bank absorbed INR 2.45 trillion through liquidity operations on Monday, similar to Sunday's figure. Advance corporate tax payments due by the end of this week may drain INR 1.5 trillion–INR 2.0 trillion, but dealers do not expect it to trigger tightness in the short-term money market.

For now, the market continues to adjust to the RBI's clear signal that the easing cycle may be done, keeping short-term yields elevated.

--Primary market

* Larsen & Toubro., HDFC Securities, DCM Shriram, and Kotak Mahindra Prime raised funds through CPs.

* Export Import Bank of India and HDFC Bank raised funds through CDs.

--Secondary market

* Bank of Baroda's CD maturing Wednesday was traded twice at a weighted average yield of 5.2568%.

* National Bank for Agriculture and Rural Development's CP maturing Wednesday was traded five times at a weighted average yield of 5.2694%.

The following were the volumes, in INR billion, in the secondary market for short-term debt at 1700 IST, as detailed by the Clearing Corp. of India's F-TRAC platform:

End

Edited by Tanima Banerjee

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