Mumbai: Bond yields plummeted on Friday after the Reserve Bank of India (RBI) governor said the government’s borrowing programme would be managed to minimize its market impact, soothing concerns about a possible flood of supplies.
The market had been worried that the government may announce a large increase in bond auctions before the 2008-09 fiscal year ends on 31 March, with the yield on the 2018 bond hitting an eight-week high of 6.53% on Thursday, 167 basis points (bps) above a life-time low of 4.86% in early January.
On Friday, the yield on the 8.24% 2018 bond was quoted at 6.19%, after falling as low as 6.14%. It had ended at 6.49% on Thursday.
Volumes were a high Rs116 billion ($2.38 billion) on the RBI’s trading platform with the 2018 bond being the most traded.
“The central bank governor’s statements were quite supportive for the medium term and yields are expected to move down, as the only major concern the market had was additional government borrowing,” said Arvind Sampath, head of rates trading at Standard Chartered Bank.
Dealers have speculated that the RBI may buy government bonds through a private placement, or counter the impact of additional supply through its open market operations to reduce the effect of additional borrowing, but Subbarao said no decision has been taken yet.
The government has already sold Rs550 billion ($11.3 billion) of bonds in excess of its budget estimate of Rs1.35 trillion for 2008-09, and has approval to sell another 150 billion before the end of February.
On Wednesday, economic affairs secretary Ashok Chawla told Reuters the government would announce any extra borrowing for 2008-09 in the interim budget, also known as the vote-on-account, on 16 February.
RBI said on Friday it set a cut off price of Rs104.03 at the auction of 7.46% federal bonds maturing in 2017, corresponding to a yield of 6.8292%.
Dealers said auction results were largely in line with market expectations.
The apex bank is due to auction the remaining Rs80 billion of bonds during 13-20 February, according to the central bank’s indicative calendar.