As food inflation shot up to a 10-year high of 19.95 per cent, the yield on government bonds softened today on belief the Reserve Bank of India (RBI) may not take steps like raising borrowing costs to contain inflationary expectations.
The yield on the 10-year benchmark 6.90 per cent paper maturing 2019 eased to 7.64 per cent in closing trades as against 7.68 per cent yesterday, according to data released by the Negotiated Dealing System.
A dealer with a public sector bond house said bonds stopped their decline as the market believed the central bank would wait for some time before making any policy move. Any action now could push up overnight rates, given the drop in liquidity. Also, this month’s debt sales were almost over, he added.
Liquidity in the market has dipped after the outgo of third tranche advance corporate tax payments on December 15. RBI’s absorption of liquidity though reverse repo operations has declined in the last four days. It had mopped up Rs 90,665 crore on December 14, today it absorbed Rs 53,990 crore.
The central bank has flagged adverse effect of the spurt in food inflation. But it can do a little since it is a supply-side issue, where scope for any policy intervention is less. So monetary tightening would not address the problem, said a treasury official with State Bank of India.
Referring to the impact of rising yields on balance sheets of banks, Revati Kasture, head of research with rating agency CARE, said that they have risen in the recent past. A further hardening of yields can impact treasury income as banks have to make provision for any erosion in price of securities kept in the available-for-sale category.
The rise in bond yields means a dent in the value of investment portfolio – which are marked-to-market and have to provide for them from profits.
On the interest income front, some banks face a risk of double whammy – the credit offtake is tepid due to moderation in economic growth while they have cut lending rates. The result is a slowdown in interest income. This has been the case for at least two quarters. The treasury profits are expected to less than those earned in the second quarter.
Banks continue to benefit from a decline in cost of deposits as they have aggressively slashed interest rates. It has partly helped to manage the pressure on margins.
