10-year bond yields hit 26-month low after RBI rate cut

Fall in bond yields will help banks books profits on their treasury portfolio since Wednesday was the half-yearly closing for banks.

Mumbai: The yield on the 10-year bond hit a 26-month low on Wednesday, a day after the Reserve Bank of India (RBI) cut its policy rate by 50 basis points (bps) and opened up more space for foreign investors in domestic debt.

The 10-year bond yield closed at a two-year low of 7.54% compared with its Tuesday close of 7.611%. In the morning trade, the yields had touched 7.527%, a level last seen on 12 July 2013. Before the policy review on Tuesday, bond yields were at 7.72%. As yields drop, prices of bonds rise.

A fall in bond yields will help banks books profits on their treasury portfolio since Wednesday was the half-yearly closing for banks. Companies borrowing from the markets through bonds also stand to benefit from lower interest costs.

According to some analysts, yields may fall further. SBI DFHI Ltd, a primary dealer, or a firm that underwrites government bond auctions, is now expecting the benchmark 10-year bond yield to fall to 7.25% by March 2016.

According to Soumyajit Niyogi, rates analyst at SBI DFHI, the central bank still has room to ease rates and that should make the bond yields fall some more.

“The yield before the policy was fully pricing in 25 basis points cut. The movement thereafter is after taking into consideration the extra 25 bps cut. But whether bond yields will move much from there depends upon how much more rate cuts are expected," said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.

More than the rate cuts, it is the additional foreign investment limit in the debt market which has excited the market. In its monetary policy, the central bank said by March 2018, foreign investors will be allowed to hold 5% of the outstanding government stock by March 2018. Limits will be hiked every six months.

For the current fiscal year, limits will be increased on 12 October 2015 and 1 January 2016 by 13,000 crore each; 7,500 crore of this increase in limit would be reserved for long-term investors and the remaining 5,500 crore for others.

“There is now more conviction in the market that good long-term foreign investors will be coming in the market and this is great news for the bond market," Krishnamoorthy said.

Falling yields are good news for both the companies and the government as both can now borrow cheaply from the market. In sync with government bond yields, yields on the AAA-rated corporate bonds have fallen to 8.2% on Wednesday from 8.38% before the policy.

A fall in bond yields, though, could further hit weak credit growth in the banking system as companies will prefer to borrow cheaper capital from the markets.

To be sure, banks have started lowering their lending rates too. Soon after the policy on Tuesday, country’s largest lender State Bank of India lowered its base rate by 40 bps to 9.3%.

Other banks, such as private sector lender Axis Bank cut rates by 35 bps to 9.5% on Wednesday.

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