Last month, the sub-limit for government bonds was enhanced by $5 billion; it is expected this will help reduce yields gradually.
In June, Consumer Price Index-based inflation rose 7.31% year-on-year, compared with 8.28 per cent in May.
Recently, a new 10-year bond was auctioned, and this is attracting fund houses. "Inflation will come down and hopefully, the government will come up with measures to contain inflation. Buying this paper will be beneficial because in a year, the yield might fall. Fund houses are maintaining long-duration, as it will be of help when interest rates come down," said K Ramanathan, chief investment officer at ING Investment Management.
According to data from Value Research, the returns of top performing gilt funds have risen 12-13% in the past year, while in the income funds category, the top performers have given returns of 14%.
"Enhancement in the FII limit in government bonds will help the bond market, considering we are having bond auctions every week. These FIIs will help take some pressure off the market, in terms of the auction supply. This will help government bond yields soften," said R Sivakumar, head of fixed income and products, Axis Mutual Fund.
In July 2013, the Reserve Bank of India (RBI) had resorted to liquidity-tightening to curb sharp volatility in the rupee. Due to this, bond (government, as well as corporate) yields had risen sharply. Though bond yields continue to remain at elevated levels, the rupee is stable and inflation is easing.
On Monday, the yield on the new 10-year government bond ended at 8.5%. The last traded yield on the 'AAA' rated public sector undertaking corporate bond was 9.2%.
In its last monetary policy review in June, the central bank had kept the repo rate unchanged at 8%. The Street expects at its next policy review, slated for Tuesday, RBI will maintain status quo on the repo rate.
