The yield on government bonds may dip following the Reserve Bank of India’s decision to cut key interest rates, signalling banks to reduce borrowing cost to customers.
Dealers said the market was expecting a rate cut for sometime now, and the present yield trend has discounted this cut. The sentiment in the market is negative due to a huge supply of bonds for supporting the government’s borrowing programme.
The yield on the 8.24 per cent note due April 2018 climbed five basis points to 6.44 per cent at the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price fell 0.40, or 40 paise per Rs 100 face amount, to 112.30.
A State Bank of India official said, “The yield on bonds will fall, helping us to make money on our portfolio of government bonds.”
Besides the Union government, states are also in the market with huge borrowing plans. Nine states are raising close to Rs 15,000 crore next week through 10-year papers.
A Prasanna, chief executive of ICICI Securities Primary Dealership, said the rate cut announcement came as a surprise at this juncture.
He expected the yield on the 10-year paper to decline by 20-25 basis points as an immediate reaction.
Further response from the market will depend how the RBI conducts the OMO auction. Pricing and greenshoe option will reamain the key factors.
Jayesh Shah, chief executive of DSP Merrill Lynch Primary Dealership, said, “The impact will be felt over a period. The supply of paper and communication about the government borrowing plan could have been better.”
HDFC Vice-chairman and Managing Director Keki Mistry said that bond yields would go down further following the rate cut.
“Investors have to churn portfolio more often since they have to absorb a large amount of supply,” said S Srikumar, chief debt trader at state-owned Corporation Bank in Mumbai. “Yields will be pressured to rise till then.”
India has raised its borrowing target for the fiscal year ending March 31 by 80 per cent to Rs 263,000 crore. It plans to sell Rs 8,000 crore of the 6.05 per cent bonds maturing in 2019 this week, and Rs 2,000 crore each of the 8.24 per cent securities due in 2027 and 6.83 per cent, 2039 notes.
The government is borrowing more to fund economic stimulus measures aimed at shielding Asia’s third-largest economy from global recession.
The central bank will ensure the government’s borrowing programme is non-disruptive, Deputy Governor Shyamala Gopinath told reporters in Mumbai yesterday.
