Mumbai: Wednesday’s rate cuts by the Reserve Bank of India (RBI) failed to cheer the bond market as yields on government bonds closed almost flat on Thursday.
Lowering of key policy rates also weakened the rupee. The Indian currency rose beyond 52 a dollar in intraday trade Thursday and closed at 51.76 after state-run banks started selling dollars in the market at the behest of the banking regulator. The rupee hit a record low of 52.2 a dollar on Tuesday.
“The market perceived that the rate cuts were to accomodate the high government borrowing and make it easy for the government to borrow cheap rather than to help the corporations and the economy. So, they didn’t take the rate cuts seriously,” said Rugved Dhumale, associate vice-president, Mecklai Financial Services Ltd, a foreign exchange consulting firm.
False move? Wednesday’s rate cuts by the Reserve Bank of India have largely been ineffective. Harikrishna Katragadda / Mint
“In this scenario, I think it is highly improbable that the rupee will strengthen considerably in the next month or two.”
The bond markets rallied slightly as yields on the most-traded nine-year paper fell by 21 basis points in early trading, but rose again to close at 6.42% from Wednesday’s close of 6.44%.
One basis point is one hundredth of a percentage point.
RBI’s 50 basis points cut in key policy rates fell short of expectations, as dealers had already factored in such a cut into their yield projections as early as a month ago. A 100 basis points cut, though, might have made a difference, they said.
According to dealers, rate cuts would not be sufficient to counter the oversupply of government bonds. The government will borrow Rs32,000 crore from the market in March and a record Rs3.62 trillion in next fiscal, beginning April, to bridge its widening fiscal deficit.
The government estimates its fiscal deficit at 6% of GDP in the fiscal year ending 31 March, up from an initial estimate of 2.5%.
“The overall negatives are still outweighing the positives and the huge supply that is scheduled for the current and next fiscal year is a huge deterrent for yields to come down,” said Bekxy Kuriakose, head of fixed income at DBS Chola Mutual Fund.
On Thursday, RBI bought Rs7,710 crore worth of government bonds from the market through its so-called open market operation, a day ahead of a Rs12,000 crore government auction. RBI originally planned to buy up to Rs9,000 crore worth of securities.
Traders said they were disappointed with the mix of bonds that RBI offered to buy at Thursday’s auction because they are not widely held debt.
“The bond market will rally, probably next week. I continue to believe that the yields (on the nine-year paper) will come down to 6% in about a week,” said S.S. Raghavan, head of treasury at IDBI Gilts Ltd, a firm that buys and sell government bonds.
RBI has since October pared its repo rate, or the rate at which it injects liquidity in the system, by 400 basis points to 5% and reverse repo rate, or the rate at which it sucks out liquidity from the system, by 250 basis point to 3.5%. The rates are now at a record low. The reverse repo is the rate which RBI offers to banks to park excess liquidity.
“The decision to cut rates is taken in a week when the PMI (Purchasing Managers Index) remained weak, exports contracted and growth numbers were a shock, and that shows the economy is in the doldrums,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
“Combine that with the fact that banks are not lending because of falling loan demand and are getting increasingly risk averse, you have the recipe for this negative contagion spreading.”
Banks on Thursday, however, ignored the low interest rates and parked Rs67,825 crore with the central bank, higher than the average of Rs64,000 crore over the past seven days.