The Reserve Bank of India’s clarification on the modalities of the additional government borrowings resulted in the yield on benchmark government bonds falling 18 basis points On Wednesday.
Compared with yesterday’s close, the yield on the 8.24 per cent paper due in April 2018 fell 21 basis points to 6.27 per cent in morning trade, but closed at 6.30 per cent. Yesterday, the yield moved up 13 basis points to 6.43 per cent soon after the government said that it will borrow an additional Rs 46,000 crore by March 20.
Bond prices, which have an inverse relationship with yields, fell as there was lack of clarity on the modalities. Late evening, however, the central bank governor clarified that RBI would conduct the government borrowing programme through open market operations and ensure least disruption to the market.
“The market perceived it to be a transparent way of carrying out the operations, which is reflected in the fall in yields On Wednesday,” said a bond dealer.
In addition, the market expects inflation to moderate until March-end, especially when crude oil prices have dipped below the $40 a barrel mark.
There is also an expectation of a reduction in the cash reserve ratio over the next few weeks to ensure that adequate availability of resources for banks for the borrowing programme and also to ensure that advance tax payments did not such out liquidity.
Corp bonds subdued
NW18 adds: Trade in corporate bonds was subdued as market participants chose to remain on the sidelines On Wednesday due to uncertainty over yields going forward and extent of the Reserve Bank of India’s support in government borrowing plan, dealers said.
Typically, movement in corporate bond yields is dependent on gilt yields of similar maturity. The 8.24 per cent, 2018 gilt ended at 6.30 per cent On Wednesday, down 18 bps from Tuesday’s close.
“There is lot of uncertainty regarding government borrowing. Most traders are staying light in corporate bonds due to this uncertainty,” said a dealer at a provident fund. The government had announced Tuesday it will borrow Rs 46,000 crore more between February 20 and March 20.
Most traders in corporate bonds market are avoiding fresh purchases of state-owned papers on view they may have to invest in gilt auctions. However, RBI Governor D. Subbarao has said the central bank would ensure government’s borrowing programme in the most market-friendly manner.
The central bank also said On Wednesday it will conduct gilt purchases under open market operations. But, bond traders are still sceptical as the central bank has not spelled out details such as amount of gilts it would buy as well as tenure and yield.
Moreover, most insurance companies and provident funds have utilized their limits to invest in state-owned papers and demand from such crucial investors was absent. On Wednesday, only few mutual funds bought corporate papers while primary dealers were sellers.
Indian Railway Finance Corp’s 10-year bonds were traded in 9.10-9.25 per cent band compared with 9.05-9.20 per cent on Tuesday. Power Finance Corp’s 10-year bonds were dealt at 9.20-9.25 per cent band, unchanged from Tuesday’s level.
Reliance Industries’ three-year bonds were trading at 9.57 per cent On Wednesday, while the company’s five-year bonds were dealt at 9.86 per cent in the secondary market.
Nearly Rs 208 crore of bonds were traded On Wednesday, against Rs 14,075 crore on Tuesday, according to Fixed Income Money Market Derivative Association’s reporting platform. On Wednesday, trade was thin for fertiliser bonds due to lack of supply. Some food bonds were being dealt in the secondary market, dealers said.
“Fertiliser bonds were hardly traded On Wednesday as there is no supply of fresh bonds. Most of the bonds have been taken by provident funds,” said a dealer at a brokerage firm. The 7.95 per cent, 2026 fertiliser bonds were dealt at 7.94 per cent On Wednesday, while 8.03 per cent, 2024 food bonds were being dealt in 7.81-7.84 per cent band. The 8.23 per cent, 2027 food bonds were dealt at 7.98 per cent.
