The Reserve Bank of India’s decision to conduct open market operations (OMO) on the last day of the financial year helped government bond yields to ease, providing some relief to banks, which now have to make lesser provisions on account of mark-to-market (asset revaluation) losses on their bond portfolio.
The yield on 10-year benchmark government bonds closed at 8.57 per cent as compared with 8.61 per cent yesterday. Bankers said on the last day of the financial year, the closing level of yields is announced by the Fixed Income Money Market and Derivatives Association of India (Fimmda), after taking into account the weighted average yield of the day. As there was a spurt in yields at the closing hour, dealers expected the actual yield to be slightly lower than the last one.
The central bank on Friday purchased government securities worth Rs 4,528 crore via OMO and the payment will be made on the coming Wednesday. RBI had notified the OMO auction of Rs 10,000 crore yesterday, after market hours.
Yields on government bonds were on northbound since the mid-quarter review by RBI on March 15 and the Union Budget the following day. While RBI review was hawkish, as no indication of reversal in policy stance was indicated, the Budget announced a high borrowing plan, which led to a spurt in yields. The government pegged Rs 5.69 lakh crore of gross market borrowing for 2012-13, higher than the Rs 5.1 lakh crore raised in the current financial year. Bond yields had soared to 8.63 per cent after the announcement that the government would borrow Rs 3.7 lakh crore or 65 per cent of the amount in the first half of the financial year.
According to treasury officials, banks still have to make provision for mark-to-market losses for the current quarter, as the closing level of yields is higher than in the previous quarter.
“We expect yields to be on the higher side in the first quarter of the next financial year, that is 2012-13, as borrowing figures are high and 65 per cent of the annual borrowing is to be completed in the first six months. In addition, the market no longer expects aggressive rate cuts by the central bank, due to high oil prices and high fiscal deficit,” said a top official of a mid-sized public sector bank.
Market participants expect bond yields to rise to nine per cent levels in the absence of policy rate cuts in April-September 2012.
Also Read
The central bank’s officials will meet on April 17 to review the policy stance in its annual monetary policy review and the jury is out if RBI starts the rate reversal cycle.
After raising interest rates for 20 months between March 2010 and October 2011, the central bank maintained status quo on rates for two consecutive policy reviews. However, since January, banks’ Cash Reserve Ratio was reduced by 125 basis points to 4.75 per cent, to ease the liquidity crunch.