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| The yield on 10-year benchmark government paper slipped to 4.94 per cent today. This essentially means that the real return on the 10-year paper is negative since inflation is veering around a shed over 5 per cent. |
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| With this, the yield on 10-year paper has more than reduced by half over the last three years. In October 2000, it stood at 11.7 per cent. |
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| However, bankers and analysts feel that yields may even fall further to as low as 4.60 per cent. |
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| "If the central bank cuts interest rates by 50 basis points as is envisaged in the credit policy, we might see yields on 10-year at 4.60-65 per cent," said IndusInd Bank senior vice president & head treasury Sharukh Wadia. |
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| Even before the announcement of the Credit Policy on November 3, he sees yields on 10-year paper touching 4.85 per cent levels. |
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| "There is no point trying to co-relate the inflation rate with yields on 10-year paper. It's like comparing one-year historic inflation rate with 10 years into the future," said a debt market analyst. |
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| Today while overnight call money rates are quoting at 4.4 to 4.5 per cent, hovering near the repo rate of 4.5 per cent, three months and one year paper (91-day and 364-day treasury bills) are ruling at 4.4-4.38 per cent and 4.32-4.3 per cent respectively. This is even as 10-year money is quoting just slight higher at 4.95-96 per cent. |
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| Said Wadia: "Looking back, 25 years ago inflation was ruling at 15-20 per cent but interest rates were ruling at 4-5 per cent. One should see the average inflation rate remains at 5 per cent. Then it will not be a problem for the RBI to think twice about cutting the interest rate." |
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| If the RBI really wishes to curb stop the strong inflow of foreign exchange and curb the interest rate arbitration, Wadia feels that it could even cut interest rate by 100 basis points. |
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| "If this happens, then yields on 10-year paper could touch as low as 4.25 per cent," he added. |
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| With the rupee strengthening against the greenback, and interest rates continuing to be higher than that in developed nations, there has been a heavy inflow of foreign exchange. |
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| The rupee closed on Thursday at 45.34-35 against the dollar, and could have ended firmer but for RBI's intervention at 45.35, when it bought dollars through state-run banks. |
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