The yield on 10-year government paper on Friday touched a three-month high after the Reserve Bank of India (RBI) set a higher-than-expected cut-off point for auction of papers worth Rs 12,000 crore.
Following Friday’s spike, the yield on the 2018 paper rose 24 basis points (bps) to 6.75 per cent, the highest since December 5, 2008. Since December 31, the yield on this paper has increased 148 bps. The new benchmark 10-year paper — 6.05 per cent, 2019 – also saw a closing yield of 6.48 per cent against the previous close of 6.10 per cent, according to the Negotiated Dealing System data.
If the trend continues till the end of the month, banks will have to take a hit on a part of their bond portfolio and their bottom lines may come under additional pressure.
The cost of borrowing for companies may also go up as the bunching of government borrowing during this month will suck out funds from the system, bond dealers said.
Even next week, there will be pressure on the market due to a variety of factors.
For starters, the market will be shut on two of the five trading days. Also, on Monday, nine state governments will borrow close to Rs 16,000 crore.
This will be in addition to the Centre’s normal borrowing programme. During the week, RBI, on behalf of the government, has lined up treasury-bill auctions for Rs 8,000 crore. Further, the Centre will raise Rs 12,000 crore through long-term bonds. So, in all, the Centre and states will borrow around Rs 36,000 crore.
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Monday onwards, banks will also start making arrangements to meet the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) norms as Friday is the reporting day. Typically, banks make arrangements at the start of the week by either setting aside cash, or raising money from the market.
The coming week will see additional pressure due to demand from companies, which have to pay the final instalment of advance tax by March 15. During the last quarter, companies paid around Rs 45,000 crore advance tax. But due to the economic slowdown, dealers said, the outgo may be lower this time.
While announcing the results of Friday’s auction of the new 10-year paper, RBI set a cut-off yield of 6.50 per cent to borrow Rs 8,000 crore against the market estimate of a cut-off point of 6.35 per cent, dealers said.
They added that RBI’s latest, 50-bps repo rate cut indicated soft rates, but the central bank fixed a stiff cut-off for Friday’s auction.
RBI also auctioned two other securities worth Rs 4,000 crore. In all auctions, there was devolvement on primary dealers (PDs) as the expectation of yield did not match with the cut-off set by RBI. In all, Rs 1,560 crore devolved on the PDs.
With the government planning to borrow another Rs 33,000 crore during the remaining part of the financial year, there is pressure on market participants.