Yields were on an unidirectional trend upwards in December till they stabilized in the band of 6.46-6.47% later
in the month before ending at 6.45%. Despite the RBI staying put on rates, yields have been pushing higher
as the market tries to price in the “stealth tightening”. The RBI gave a clear signal of its intent to balance the
excess liquidity still prevailing in market and this pushed up yields on the shorter-end while supply continues
to weigh on the longer-end. In particular, it was the announcement of the 3Day Variable Rate Reverse Repo
auction (VRRR) that the market drew strong inferences from. Governor Das had stated in the MPC meeting
that the RBI seeks to rebalance the liquidity surplus by shifting it from the fixed rate reverse repo window to
the variable rate reverse repo (VRRR) with the 14-day VRRR auction as the main liquidity management tool.
As more liquidity is absorbed via the auction at rates higher than the revere repo rate the weighted average
rate will move even closer to the repo rate, at which point the adjustment in the fixed rate reverse repo may
just be a technicality. On the last day of the month and calendar year, the RBI also indicated its discomfort on
existing yield levels in the market as it cancelled INR 170bn of the auction, of which INR 130bn was of the
10y benchmark, against the total amount of INR 240bn. The market is also expecting the announcement of a
new 10y benchmark shortly as the current benchmark is close to its optimal outstanding issuance. The Union
Budget is the next big event and the market would attempt to price the event in coming weeks. On the whole,
the month of December saw the 10y benchmark continue its uptrend trading in a range of 6.35%-6.48%
and eventually ending the month 12bps higher m-o-m at 6.45%. The 10y benchmark averaged 6.41% over
the month of December.