G-sec yields may rise further as RBI absorbs liquidity, says UBI
Union Bank of India warns that RBI liquidity absorption and global pressures like US Treasury yields could drive government bond yields higher.
Government bond yields are facing significant upward pressure, driven by a combination of aggressive liquidity absorption by the Reserve Bank of India (RBI) and mounting global economic tensions, according to a recent report by Union Bank of India (UBI).
The report suggests that the domestic debt market remains cautious as investors weigh the impact of central bank actions against a volatile international backdrop. The trajectory of government securities (G-secs) will largely depend on how the RBI manages domestic liquidity through various mechanisms.
The RBI’s Role in Liquidity Management
A primary driver for the potential rise in yields is the way the RBI is tightening the money supply. The UBI report highlights that several factors will shape upcoming liquidity conditions, including:
- The pace and composition of liquidity absorption via Open Market Operation (OMO) sales.
- The utilization of further foreign exchange (FX) swaps.
- Net reserve accumulation under the Foreign Exchange Reserve Ratio (FERR).
To understand how lenders are reacting to a narrowing liquidity surplus, analysts are closely monitoring the Weighted Average Call Rate (WACR)—the average rate at which banks lend to each other overnight—in relation to the repo rate. Additionally, the level of bank participation in longer-tenor Variable Rate Reverse Repo (VRRR) auctions serves as a critical indicator of market adjustment.
Recent Trends in Bond Yields
The market has already seen a notable uptick in yields since the end of September. The data reflects a clear upward trend across different maturities:
- 10-year G-sec yield: Stood at 7.40 per cent as of October 14, marking an increase of approximately 20 basis points from the end of September.
- 5-year yield: Rose by about 22 basis points to reach 7.25 per cent.
- 30-year yield: Climbed to 7.82 per cent, up from 7.67 per cent in the same period.
Global Pressures and the Rupee
While domestic policy is a major factor, the UBI report emphasizes that global developments remain central to the outlook for both the Indian rupee and domestic bond yields. The report identifies three major external pressures that continue to fuel inflation and strain the external sector:
- Crude Oil Prices: Sustained prices above USD 100 per barrel.
- US Treasury Yields: Elevated yields in the United States.
- Dollar Strength: The continued dominance of the US dollar.
Interestingly, the RBI's recent foreign exchange interventions have provided some relief to the local currency. Following these measures, the rupee strengthened to approximately 95.04 against the US dollar, representing an appreciation of about 1 per cent since the end of September and 1.8 per cent since October 9.
However, UBI cautions that this currency recovery has not fully eased anxieties in the bond market. The combination of ongoing liquidity withdrawal and expectations of further policy tightening continues to weigh heavily on government securities.