Yields on the government bonds are expected to continue to fall as the market expects relief from continuous weekly auctions. The government has been borrowing Rs 12,000-13,000 crore every week since the start of the second half of the current financial year. According to the bonds issuance calendar, there are no auctions scheduled for sale this week.
On Friday, the yields on the ten-year benchmark government bond closed at 8.37 per cent, higher by four basis points over the previous day’s close and one basis point lower than the previous week’s close. Bond price of ten-year benchmark government bond closed the week at Rs 102.8 after touching a high of 103.41 on Tuesday.
Bond yields had eased early last week as a shift in policy stance by the Reserve Bank of India (RBI) raised hopes of possible rate reversals going forward. A declining trend in food inflation and bond purchase via open-market operations (OMOs) kept a check on rising yields during the week.
“Yields should continue easing to 8.30-8.35 per cent as the government has indicated that it will be sourcing some portion of its funding needs from means other than the market,” said T S Srinivasan, general manager (treasury), Indian Overseas Bank. The government plans to borrow Rs 50,000 crore by pledging the assets of Specified Undertaking of the Unit Trust of India (SUUTI) with state-owned banks.
This is expected to ease the pressure on the government’s market borrowing programme. In September, the government had announced additional borrowing of Rs 52,800 crore in the second half of the current financial year.
Meanwhile, liquidity is expected to stay under pressure as banks will borrow to meet their quarter-end targets. During last week, banks borrowed more than Rs 1.5 lakh crore every day as advance tax payments drained liquidity from the system. Banks have also been tapping the additional liquidity adjustment facility (LAF) window to meet reserve needs. Banks borrowed Rs 9,900 crore on three consecutive days last week from RBI under the Marginal Standing Facility (MSF) at 9.5 per cent.
In order to ease pressure on liquidity, RBI has bought bonds of about Rs 32,000 crore against Rs 40,000 crore as notified in four OMOs. Taimur Baig and Kaushik Das, economists at Deutsche Bank, expect RBI to conduct Rs 70,000-80,000 crore of OMOs this year. “These OMOs would influence the liquidity dynamics over the next few months,” they said in a report.
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Rupee to stabilise
Lower trading volumes against the backdrop of Christmas vacations abroad may help ease the pressure on dollar liquidity, leading to a stability in foreign exchange market. However, year-end demand from Indian oil importing companies may weigh on the dollar-rupee exchange rate. On Friday, the rupee closed at 52.73 against the dollar, compared to the close of 52.50 the previous day.
The Indian currency has depreciated close to 20 per cent since it rose to its three-year high of 44.08 in August 2011. RBI has taken a slew of measures to attract foreign currency inflows and cut artificial dollar demand by curbing speculations.
A number of private sector banks increased the interest rates of non-resident (external) rupee term deposits by 600-700 basis points last week. On December 16, RBI had deregulated rates on these deposits. However, banks cannot offer rates higher than those on domestic deposits of similar maturity periods.