Mumbai: Bond yields rose on Thursday on worries national elections would throw up a weak coalition government, but ample cash and a favourable auction results for a new five-year bond headed off a sharp spike.
The benchmark 10-year bond yield ended at 6.38%, above it previous close of 6.33%.
The yield fell to 6.29% in early deals, its lowest since 8 May, and traded as high as 6.41% during the day.
“The new government’s dependence is likely to be a critical factor,” said Roy Paul, deputy general manager of treasury at Federal Bank.
The ruling Congress-led coalition and its main rivals were jostling to secure new allies on Thursday to boost their possible parliamentary numbers after exit polls said both would fall well short of a majority.
Volumes were a average Rs83.85 billion ($1.7 billion) on the Reserve Bank of India’s trading platform with the 2019 bond being most actively traded.
Dealers said the incoming government’s budget will be watched closely, as spending plans will have implications for the borrowing programme and planned debt issues.
“Any party with clear priority say towards the agriculture sector may imply an increase in subsidies, adding to the cost of government expenditure,” said Deepali Bhargava, economist, ING Vysya Bank in Mumbai.
The current government has outlined plans to borrow a record Rs3.62 trillion from the market in 2009/10, two-thirds of which is due to be completed in the first half of the year.
The RBI auctioned Rs120 billion of bonds on Thursday. Dealers said the yield cut-off of the new 5-year bond was lower than expected, while the yield cut-off of the 2022 bond was higher than market hopes.
Trade was likely to be choppy until a new government was formed and outlined its spending and borrowing plans.
“Corporates may need to depend on the domestic debt market to raise funds, which may put an upward pressure on interest rates,” Paul of Federal Bank said.
The wholesale price index rose 0.48% in the 12 months to 2 May, below the previous week’s annual rise of 0.70% but above a median forecast of 0.3% in a Reuters poll.
Dealers said although inflation is currently near zero, its recent rise is a concern and yields ticked up on the data.