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Short-term rates to spike further in 2022 as RBI steps up liquidity normalisation

Short-term rates to spike further in 2022 as RBI steps up liquidity normalisation

Yields on short-term debt across instruments are expected to further rise sharply in calendar year 2022 as the Reserve Bank of India (RBI) has stepped up measures to tighten liquidity from the banking system through regular 14-day and short tenor variable rate reverse repo (VRRR) auctions. Aiding this sentiment are expectations of a reverse repo rate hike in the coming months.

According to fund managers and brokerage firms, rates on short-term debt instruments are expected to rise by 70-120 basis points over the year. After the December monetary policy, short-term yields have already risen by 25-30 basis points.

“RBI has reduced the overall liquidity in the system via long-term reverse repos, which has led to a spike in overnight rates. As a consequence, short-term rates of T-Bills, CPs have also risen steadily.

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