Bond yields are expected to open firm on account of tight liquidity conditions and low probability of fund infusion through open market operations (OMOs) this week. Also, a higher government borrowing plan announced for 2012-13 may keep yields elevated.
On Friday, yields on the 10-year benchmark government bond closed at 8.42 per cent, six basis points (bps) higher than the previous close. Bond yields jumped about 15 bps to touch an intraday high of 8.45 per cent following announcement of a higher-than-expected market borrowing plan for 2012-13. Traders said bond yields could march up to 8.5 per cent levels before the end of the current financial year.
The government has pegged Rs 4.79 lakh crore of net borrowings from the debt market for next financial year. The gross borrowing increases to Rs 5.69 lakh crore, compared to Rs 5.1 lakh crore raised in 2011-12. The government aims to fund 93 per cent of the fiscal deficit through market borrowings.
Reserve Bank of India Deputy Governor H R Khan said the government’s market borrowing programme is a challenge for the central bank. However, RBI has tools like OMO, cash reserve ratio and liquidity adjustment facility (LAF) to manage liquidity-related issues.
"If the structural liquidity position becomes normal, then RBI may discontinue with its OMO operations. This is the fear at this stage," said Moses Harding, head-economic and market research at IndusInd Bank. He added there may not be demand for government securities till RBI gets into a rate-cut mode since the banking system is already holding statutory liquidity ratio (SLR) in excess of four per cent over the minimum mandate of 24 per cent of net demand and time liabilities.
On Friday, banks borrowed Rs 1.77 lakh crore from RBI under LAF window for three days. Also, the overnight call money rate shot to up 9.25 per cent, reflecting high demand for funds at the end of the first week of the reporting fortnight. Liquidity tightness can also be attributed to the fund outflow on account of corporate advance tax payments.
Khan said liquidity conditions are expected to improve next financial year as government spending worth Rs 60,000 crore is lined up for the first fortnight itself. This includes redemptions and state transfers, he said.
In 2011-12, RBI mopped up illiquid government securities worth over Rs 1 lakh crore via OMOs in order to offset the impact of the upward revision of the borrowing programme on the markets.
