India’s key money-market rates and yields on short-term debt rose after the central bank took its first small step toward unwinding emergency pandemic measures. The weighted interbank call rate rose to 3.44% as against its previous close of 3.18%, while the yield on a five-year bond surged 13 basis points after the Reserve Bank of India said late Friday it plans to drain liquidity via a reverse repo operation.
The announcement is “a clear signal from the central bank that it wants to slowly start the process of exiting from the extraordinary accommodation that remains in place,” said Kaushik Das, chief economist for India at Deutsche Bank AG. “The central bank wants to nudge the various short-term interest rates to converge to the reverse repo rate gradually.”
There has been growing consensus among traders that the RBI will start draining excess cash, as surging liquidity caused money-market rates to drop below the central bank’s interest-rate corridor last year, distorting asset pricing. Still, the RBI refrained from doing so in its December review, prompting traders to push back cash tightening bets to the second quarter of 2021.
RBI’s announcement on Friday to retract 2 trillion rupees of banking funds via a 14-day reverse repo operation on Jan. 15 caught many, including Citgroup Inc., by surprise. The bank expects the yield curve to bear-flatten with forecasts for the 10-year yield to stay in the 5.75%-6% range. The yield on the 5.15% 2025 bond jumped to 5.22%, while the benchmark 10-year yield was up five basis points