10-year bonds trade at 7-year low because of Modi’s fight against black money
The 10-year bond yield was at 6.664% a level last seen on 9 June 2009down 14 basis points from its previous close of 6.798%
Mumbai: India’s 10-year bond yield hit over a seven-year low on Wednesday, after the government banned Rs500 and Rs1,000 bank notes in an attempt to curb black money.
The 10-year bond yield was at 6.664%— a level last seen on 9 June 2009—down 14 basis points from its previous close of 6.798%.
The move to withdraw the high denomination notes as legal tender could lead to large deposits of money at bank branches. Given the ceiling on withdrawal of cash at Rs4,000 and that of Rs10,000 through cheque at bank branches, the liquidity is likely to stay within the banking system in the short term.
Banks may see a jump in their deposits, especially low-cost current and savings account (CASA) deposits. This augurs well for interest rates, besides boosting liquidity.
Given that credit growth is still modest at around 10%, the excess liquidity will find its way into bond purchases.
“The market is expecting that the large cash in circulation will come back in the banking system and eventually it will increase the demand for SLR securities," said Soumyajit Niyogi, associate director, India Ratings. SLR, or statutory liquidity ratio, is the proportion of deposits that banks have to invest in government securities.
“This is also likely to increase tax collections which will help achieve the fiscal deficit target," he added.
However, Niyogi sees this bond yield rally as a short-term phenomenon since the Reserve Bank of India will stop making open market bond purchases after the cash comes into the system .
Another factor supporting the bond rally is Donald Trump winning US elections.
Trump’s presidency is expected to infuse volatility in markets and bonds will gain across geographies as a safe haven asset.
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