With the Reserve Bank of India’s (RBI’s) assurance on steps to manage inflation, the yield on government bonds is likely to remain stable in the coming week.
The yield on 10-year benchmark government bond (7.80 per cent paper 2020) closed with higher yield at 7.83 per cent, up from the previous week’s level of 7.80 per cent. The yield on 10-year paper had closed at 7.91 per cent on Thursday.
The yield on government bonds had moved up at the beginning on concerns of oversupply of paper. Statements from RBI Governor D Subbarao and his deputy, Subir Gokarn, on adequate steps taken for managing inflation tempered the sentiment. The steady improvement in liquidity in the banking system helped to stabilise the mood in the bond market.
Call rates to remain steady
Interest rates in the overnight interbank market are expected to remain steady on improvement in the liquidity in the system. The central government’s cash balance with the RBI declined sharply in the week ended July 30, according to latest RBI data.
This underscores that such spending has been the reason behind the improvement in liquidity this week, and the subsequent fall in overnight rates. This week, banks turned net lenders to RBI from being net borrowers and the call rate has been hovering around the reverse repo rate of 4.75 per cent, rather than the repo rate of 5.75 per cent.
