The yield of the 10-year government paper has touched an all-time low of 9.60 per cent. The yield of the benchmark paper has fallen by more than 125 basis points in the last six months on the back of ample liquidity, stable foreign currency market and a soft interest rate outlook.
The dip in yields, however, was mainly concentrated in the longer end of the market. Five-year paper yield currently is at 8.70 per cent level, around 50 basis points lower than the yields in the beginning of the financial year.
However, this may not be the end, as analysts expect the 10-year paper yield to fall further and touch the 9.50 per cent mark in a month as there is very little chance for an industrial turnaround in the short run and hence a recovery in credit offtake.
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Moreover, dealers feel, liquidity will be further eased up by an inflow of Rs 20,000 crore owing to redemption of government securities in the next two months. Analysts expect an industrial turnaround only if the monsoon is good.
They feel that the yield of 10-year paper will face resistance at 9.50 per cent by the government borrowing programme which may overshoot at least by Rs 10,000 crore in this fiscal. The expectation is on the back of the aggressive borrowing done by the RBI, completing 42 per cent of the gross borrowing programme.
This is supported by the latest collection figure, which shows that the net tax collection in the first month of the fiscal fell to Rs 150 crore form Rs 1,047 crore in the corresponding period of the last fiscal. Total tax and no-tax receipts of the government came down to Rs 1,651 crore from Rs 3,050 crore. Government expenditure on the other hand went up to Rs 16,072 crore from Rs 15,849 crore.
Dip in the yield is the reflection of the poor economic performance. The year-on-year industrial growth of the country measured in terms of index of industrial production (IIP) touched the 4-year low at 1.9 per cent in April. The lower IIP growth resulted in lower credit off-take.
The non-food credit off-take suffered a negative growth of Rs 2,129 growth in the first two months of the current fiscal against a growth of Rs 2,443 crore during the corresponding period last fiscal.
On the other hand, deposit growth has been quite high in the first two months at Rs 45,024 crore against Rs 28,193 crore during the corresponding period of the fiscal. The mis-match between the deposit growth and credit offtake left huge liquidity in the hands of banks which pushed down the yields to their all-time low.
This was helped by the RBI's decision to bring down the benchmark rates -- bank and repo rates. The bank rate has been brought down by one percentage point to 7 per cent in two stages -- on February 16 and March 1. The repo rate has also been brought down by one percentage point to 6.50 per cent. The central bank also effected a cut in the cash reserve ratio by 50 basis points to 7.50 per cent in May.