Mumbai: Rising inflation figures turned the sentiment of the government bond market bearish on Monday, lifting the yields of bonds across different maturities.
The benchmark 10-year bond yield rose to 7.72% from its Wednesday’s close of 7.63%. At the longer end, the 30-year bond yield touched 8.23% after opening at 8.12%, while the 364-day treasury bill yield rose to 7.45% from 7.31%.
Yield and prices of bonds move in opposite directions
The wholesale price-based index inflation rose to 5.92% in the first week of March, beyond the Reserve Bank of India’s (RBI) 5-5.5% projection for fiscal 2008 and its medium-term objective of bringing it down to 4-4.5%.
The sudden spurt in inflation has ruled out any possibility of a rate cut by the central bank despite the slowdown in growth of bank credit.
Bond dealers expect the yields to rise further.
“At this price, banks would not like to sell their bonds and book a loss in their portfolio. They would possibly wait till the fiscal year-end and after that, the 10-year bond yields will rise again,” said Aloke Prasad, assistant general manager of Securities Trading Corp. of India Ltd, a non-banking finance company that also buys and sells bonds.
Dealers are also concerned about the rising yields of the short-term bonds, which is making the sovereign yield curve flat.
Even before the sudden rise in inflation, yields on short-term government papers and treasury bills have been on the rise on account of relatively tight liquidity conditions.
“The yield curve is bound to steepen. We will not be surprised if the benchmark 10-year paper yield goes up,” said A. Prasanna of ICICI Securities Primary Dealership Ltd, a firm that buys and sells government securities.
“The environment where it would have been comfortable for the central bank to cut the interest rate has changed,” said Vijay Anand, associate vice-president (money market) of Development Credit Bank Ltd. “In the short term, there is hardly anything positive for the bond market as inflation has risen. Besides, the government will also incur additional expenditures on account of the pay commission’s recommendations,” he added.
The Sixth Pay Commission on Monday recommended an increase of Rs12,561 crore in pay and other benefits for government employees.
According to Anand, RBI is not expected to make any change in its policy stance in April, when it announces its annual monetary policy.
“The market is now expecting any change in stance by the RBI in its July policy,” Anand said.
The government, in its 2008 Budget, had announced a gross borrowing programme of about Rs1.45 trillion in fiscal year 2009.
Net of redemptions, the annual borrowing next fiscal, beginning April, will be around Rs1.05 trillion.
Bond dealers expect the bulk of the borrowing to be done in the first half of the fiscal year, putting pressure on the bond yields.
Without tinkering with the interest rates, RBI can tighten the monetary policy by raising banks’ cash reserve ratio—the money that commercial banks need to keep with the regulator. It can also aggressively issue bonds under its market stabilization scheme.
Under this scheme, RBI can raise up to Rs2.5 trillion worth of bonds, significantly higher than last year’s budgeted target of Rs1 trillion. So far, about Rs1.7 trillion worth of bonds have been issued.