Market participants felt that the increase in VRRR auctions is a gradual step towards policy normalization and the central bank is likely to increase the reverse repo rate in the December policy.

Yields on corporate bonds rated AA and above increased by around 5-10 basis points in the secondary market between October 7 and 11, over tenure, as government yields rose. and the withdrawal of G-SAP by the Reserve Bank of India (RBI) from monetary policy.

However, on October 12, papers with a three-year maturity experienced a slight moderation in returns on few purchases from fund houses. Between October 7 and October 11, corporate bond yields of Crown corporations and companies rated AA and above with three-year maturities were trading around 5.27-32%, while those on 5-year papers. and 10 years hovered around 5.85. -90% and 6.90-95%, respectively.

“The markets seem to have reacted to the announcement of the RBI policy and the halting of G-SAP operations is certainly one of the triggers. Corporate bonds move more or less in tandem with G-Sec yields which have hardened following the RBI’s policy announcements, ”said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.

Over the past few days, G-Sec yields have risen nearly 8 basis points, mainly after monetary policy, and hit their highest levels since April 17, 2020, but have eased 2-3 basis points. base in the last two days. The rise was seen after the central bank canceled G-SAP operations and signaled the start of policy normalization.

The central bank in monetary policy had decided to halt the G-SAP auctions until the need arose while ensuring that they would conduct a G-SAP auction whenever liquidity conditions l ” would also require and continue to flexibly conduct other liquidity management operations, including Operation Twist (OT) and regular open market operations (OMO).

“Long-term bonds are facing a double whammy: rising crude oil prices and the end of the G-SAP program. In the absence of G-SAP, the RBI’s intervention will be tactical based on the RBI’s perception of the right level of performance. If crude stays high, the market will push the RBI to the edges to check its comfort level on returns, ”said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Dealers of brokerage firms have said investors are worried about rising crude oil prices in the international market, which could put pressure on domestic retail price inflation in the coming months.

This is despite the fact that retail sales inflation eased in September to 4.35%, due to a favorable base effect and low food inflation. In addition, market participants expect food inflation to be benign due to good Kharif production and adequate buffer stock of food grains, but fuel and metal prices could balance the trend. the moderation of retail price inflation in the future.

Brent crude oil prices have risen sharply due to improved demand for oil as most economies recover from the accelerated pace of vaccination, but production has remained stable. OPEC and its allies decided earlier this month to maintain a steady and gradual increase in production. Brent crude oil prices were trading at $ 83.15 per barrel for the December deadline.

The investor sell-off was also seen because the central bank raised the 14-day Variable Rate Reverse Repurchase (VRRR) auction amount to 6 lakh crore by December 3. The amount of each auction will be increased by 50,000 crore and will be held fortnightly.

Market participants felt that the increase in VRRR auctions is a gradual step towards policy normalization and the central bank is likely to increase the reverse repo rate in the December policy.

Public bank concessionaires have said corporate bond yields are expected to move within a narrow range and any significant increase in crude oil prices will push yields higher. “Rising crude oil prices and US Treasury yields are likely to have a negative impact on national yields,” said Anand Nevatia, fund manager, Trust Mutual Fund.

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