The yields on government bonds moved up sharply today after the government announced a large borrowing programme to fund the 2009-10 expenditure and slippage in the financial health.
Dealers said the government’s estimates for borrowing are way ahead of market expectations for the next financial year. The higher fiscal deficit will soon put pressure on the yields.
The yield on the new benchmark “6.05 per cent 2019 paper” closed 17 basis points higher at 6.02 per cent against 5.85 per cent on Friday last week. The hardening in the case of “8.24 per cent 2018 paper” was even more. The yield closed at 6.41 per cent, up from 6.17 per cent on previous trading day, according to data from the Negotiated Dealing System.
A dealer with a private sector large bond house said the only hope for the bond market now is Open Market Operations (OMO). If not for OMO, the market would have fallen more. By the month-end, the yield on the 8.24 per cent, 2018 bond yield is expected to in the range of 6.35-6.55 per cent.
Bank of India Chairman and Managing Director T S Narayanasami said though gilt yields rose sharply on the news of huge borrowing plans FY10, the 10-year benchmark 2018 paper will eventually settle at 5.80 per cent.
Narayanasami added that with inflation falling sharply, the Reserve Bank of India may cut the repo rate and reverse repo rate by 100 basis points each, but no change is expected in the cash reserve ratio.
J Moses Harding, head of the global markets group, IndusInd Bank, said, “The issues concerning the market on liquidity and interest rate having been validated now with FY10 fiscal deficit target pegged at 5.5 per cent.”
The market is deriving comfort (on liquidity) as the central bank has enough ammunition on hand to keep the system flush with liquidity, such as unwinding of the market stabilisation scheme bond and reducing the CRR. Plus, a cut in the policy rates to signal a soft stance would keep liquidity adequate and bring stability in market yields with the bond yield in the range of 5.75-6.0 per cent (for 8.24 per cent 2018) and the one-year treasury bill around 4.0 per cent, Moses said.
Higher yields will mean that long-term funds would become dearer for India Inc.
Bank of Baroda Chief Economist Rupa Rege Nitsure said the government’s higher market borrowings would have crowding effect on private investment. Companies will have to pay higher lending interest rates, reflecting the hardening of yield on government paper and risk premium.
Referring to the impact of hardening yield on the profitability of banks, BOI chief said thee profits are not expected to be hit despite rise in gilt yields.
Treasury profits will be under pressure but that will not translate into negative impact on the bottomline, said a senior State Bank of India official.
