Mumbai: Bond yields eased on Monday on media reports New Delhi was considering to cut interest rates on government small savings schemes, a move that could shift investor cash to bank deposits.
Lingering concerns about a possible increase in government borrowing curbed a steeper fall in yields, traders said.
The yield on the most traded 6.07% bond maturing in 2014 closed at 6.63%, below its previous closing of 6.66%. There were no trades in the benchmark 10-year bonds.
Volumes were heavy at Rs82.4 billion ($1.7 billion) on the central bank’s trading platform.
“The market is more worried about government borrowing rather than small savings rate cuts,” said Baljinder Singh, a dealer with Andhra Bank.
“Every week we are seeing the government exceeding the calendar size and if in the budget the proposed borrowing target is revised higher, yields will rise further,” he said.
The government raised the size of its weekly auction for the fifth straight week by 25% to Rs150 billion.
In the interim budget announced in February, the government said it would borrow a record Rs3.6 trillion in the current fiscal year that began on 1 April. The final budget will be presented on 6 July.
Last week, Prime Minister Manmohan Singh said there was room for further spending, which raised concerns the fiscal deficit target of 5.5% of GDP in the 2009-10 year could be exceeded.
The Economic Times newspaper said on Monday the rate on post office deposits and public provident fund could be cut 50-75 basis points, while the Business Standard daily said a committee would be set up to examine the issue.
Dealers said a reduction would push investors to bank deposits, which could trigger demand for bonds. Under a statutory liquidity ratio, banks have to invest 24% of their deposits in government bonds and other approved securities.