Yields on government bonds may soften further on hopes of rate cuts by the Reserve Bank of India (RBI), flexibility induced in the RBI’s open market operations (OMO) auction and clarity in the government borrowing plan for Rs 45,000 crore.
Dealers said the sharp drop in the Gross Domestic Product (GDP) fuelled rate cut hopes further. The market has been expecting a rate cut for a few weeks now as the pressure on yields was rising due to the large-sized market borrowings of the government and easing inflation.
Bond yields eased on Friday, tracking weaker than expected economic growth for third quarter of 2008-09. The turnover on Negotiated Dealing system was Rs 9,935 crore.
As a step to stave off the pressure on liquidity, RBI has resumed OMO to purchase government bonds. It will purchase government securities worth Rs 6,000 crore through the OMO auction on March 5. It has also kept the option to buy additional securities up to Rs 3,000 crore. The securities will be bought through single-price auction.
“The auction slated for this week is improvement over the first one. Its flexibility to increase size is based on response and uses single-price method as against multiple-price points method used in last auction. This could trigger aggressive bidding (higher price), leading to lower yields,” said the head of a bond house.
The central bank will transfer Rs 4,500 crore from Market Stabilisation Scheme cash account, in tranches, to the government’s normal cash account by Mar 31. An equivalent amount of bonds issued earlier under MSS will now form a part of the government’s regular market borrowing.
More From This Section
“This arrangement will avoid pressure on the market. Plus same funds will come back into the system in the form of government expenditure. It will ensure liquidity remains comfortable in March,” IDBI Gilts Managing Director N S Venkatesh said.
Rupee may fall further
Rupee may continue to see a fall in value against US dollar on slowdown in growth, concerns over deteriorating fiscal conditions and liquidation of holdings in Indian equity by portfolio investors, dealers said.
According to Bloomberg data, rupee closed at Rs 51.16 on Friday (February 27) as against 50.48 on previous trading day. The rupee saw a huge fall on concerns of heavy capital outflows as S&P is likely to cut India’s credit rating to “junk” and economic growth slumped to 5.3 per cent in the third quarter as against 8.9 per cent in same period last year.
Bank of Baroda chief economist Rupa Rege Nitsure said the combination of slowing exports and firming of oil prices in the international markets last week would further add to the rupee’s weakness.
The rupee is expected to take opening cues from the movements in stock markets. If global shares weaken overnight, then rupee may fall to record low levels again Monday, the treasury head of a public sector bank said.
Also, persistent weakness in the global equity markets and increase in risk aversion may prompt banks to buy dollars for foreign institutional investors. The greenback’s rise against Asian currencies may also weaken sentiment for the Indian unit.