Bond yield falls after RBI cancels part of auction, rupee closes at nearly four-month high
Mumbai: The yield on government bonds fell in the last trading session of 2017 after the Reserve Bank of India (RBI) cancelled part of the scheduled bond auction, bringing some relief to banks, which feared higher losses in their bond portfolios.
The 10-year bond yield ended at 7.326%, down 7 basis points from its previous close of 7.396%. Bond prices have fallen more than 80 basis points this year, making it the worst year since 2009.
Bond prices and yields move in opposite directions.
Of the total Rs15,000 crore in bonds up for auction, RBI sold only Rs4,000 crore worth. According to the auction results, RBI did not accept bids for bonds due in 2022 and 2031. Against a total of Rs11,000 crore worth bonds on sale in two categories, RBI received bids worth over Rs25,985 crore.
The reason for the rejection of bids was not clear.
The fall in yields on Friday, also the last trading session of the quarter, will help banks by reducing the provisioning required to cover losses on their bond portfolio.
Banks have to revalue their bond portfolio at the end of every quarter. In case the value of the securities is lower than the market rate, they are mandated to keep aside funds as mark-to-market provisioning.
“There will still be mark-to-market provisioning because yields have risen sharply. But with today’s fall, the total provisioning requirement by banks is expected to come down by around 50 basis points (in price terms),” said Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Financial Services.
The decision to cancel part of the bond auction came after the bond yield surged to a 17-month high on Thursday due to additional borrowings the government announced.
The government announced the additional borrowing plan on Wednesday after the goods and services tax (GST) data for December showed a slide in revenue receipts. The expanded market borrowing programme, analysts said, signals the government may breach its fiscal deficit target of 3.2% of gross domestic product.
The government breached its fiscal deficit target for the current fiscal year ending March 2018 in November, data released by the Controller General of Accounts (CGA) on Friday showed. During the April to November period, the government’s fiscal deficit was 112% of its Rs5.5 trillion target for fiscal year 2017-18, according to the data. Traders are already concerned by a surge in crude prices, which may lead to higher inflation and give RBI less room to cut rates. Meanwhile, the rupee closed at a nearly four-month high against the US dollar, tracking gains in the local equity markets.