The yield on government bonds softened on dipping inflation and rising expectations of interest rate cuts by the central bank after Suresh Tendulkar, head of Prime Ministers’ Economic Advisory Council, indicated room for such action after vote-on-account.
Dealers said the drop in the annual rate of inflation below 5 per cent reinforced the view that that it will give room for the Reserve Bank of India to cut key interest rates further. Plus RBI’s statement in Ahmedabad on prompt action in evolving circumstances also influenced the bond trading activity.
The most traded paper — 8.24 GS 2018 — saw a significant drop in yields from 8.28 per cent (Rs 113.50) in the opening trade to 6.07 per cent (Rs 115.10) at the close, according to RBI negotiated dealing system data.
The emerging benchmark paper 6.05 GS 2019 did not see much movement in yields. It closed at 5.83 per cent (Rs 101.67). The rate of inflation, measured by the wholesale price index, declined to 4.39 per cent for week ended January 31, 2009, from 5.07 per cent in the previous week.
Tendulkar said he wouldn’t be surprised if the rate cut was aggressive after the government presented its Interim Budget for 2009-10 on Monday. “Tendulkar’s comments improved sentiment further and cemented hope of further rate cuts,” said a dealer with a large private bank.
Since October, the central bank has cut cash reserve ratio by 400 basis points releasing Rs 1,60,000 crore, repo rate by 350bps and the reverse repo rate by 200bps.
In a statement issued in Ahmedabad after RBI’s central board met, the central bank said that it will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action, as and when appropriate.
The market would see choppy trading environment at least until the results of the first gilt purchase auction are announced.
RBI on Tuesday announced that it will purchase gilts through auctions under OMO beginning from Feb 19. This move by the central bank is widely seen as an attempt to keep yields under check and liquidity comfortable in face of the massive government borrowing.
Besides, sending signals cut-off yield for auction, RBI could cut the CRR further to ensure adequate liquidity in the system so the government borrowing programme sails through smoothly.
