Mumbai: A degree of normality has returned to the bond market, reflecting plentiful liquidity, easing concern about the size of government borrowings and optimism that the Reserve Bank of India (RBI) would cut interest rates for a third time this year.
On Friday, 10-year bonds completed their best week in three months ahead of Tuesday’s annual monetary policy announcement RBI.
A government decision to borrow a record Rs3.62 trillion through bond sales to bridge its fiscal deficit in the year to March 2010 had spooked the bond market, sending yields shooting up from a low of 4.86% in the first week of January to about 7% in March.
Out of the Rs3.62 trillion, the government had planned to borrow Rs2.41 trillion in the first half of the fiscal, prompting concern that corporate borrowers would be crowded out of the market.
Since then, concerns have abated because the market has realized that the first-half borrowing programme would be of a size comparable with that in the previous three years, given the planned redemption of old bonds and other measures.
“The less-than-expected fresh borrowing has comforted the market participants to a great extent,” said N.S. Venkatesh, managing director of IDBI Gilts Ltd, a firm that trades in government bonds.
RBI said in late March that it would buy Rs80,000 crore in old dated bonds under its so-called open-market operations and will also create liquidity by unwinding Rs42,000 crore in intervention bonds, sold to mop up excess liquidity from the system in past years.
Additionally, government bonds worth Rs33,000 crore are due for redemption. The net effect will be that the market will end up buying about Rs86,000 crore in fresh government bonds in the first half of the fiscal.
The yield on the 6.05% note due February 2019 slid 29 basis points last week to 6.41% at the close on Friday, the most since the period ended 16 January, according to the central bank’s trading system. The price climbed Rs2.04 per Rs100 face amount to Rs97.4275. A basis point is one-hundredth of a percentage point.
Dealers expect yields to stabilize or even rally a bit more.
“I expect the yield on the 10-year bond to dip to 6% soon,” said Anoop Verma, associate vice-president at Development Credit Bank.
Arvind Sampath, head of rates trading at Standard Chartered Bank Plc, said yields would likely be 6.25-6.75% over the next two months.
Surplus liquidity has also helped push down yields.
The government and RBI have released about Rs3.9 trillion through stimulus packages and liquidity boosting measures in recent weeks, with the result that banks, since the end of March, have been parking an average of at least Rs1 trillion daily with RBI through the reverse repo window. Reverse repo is used to drain excess liquidity from the banking system, and currently offers 3.5% interest on such funds.
“Due to the liquidity surplus, sellers have thinned out and buyers are prevailing in the market,” said Sampath of Standard Chartered.