Government bond yields fell sharply over two trading sessions with the benchmark 10-year bond yield hitting two-year low on Tuesday on hopes the government may not exceed its market borrowing target for the current year.
Such hopes were fanned after the government deferred a bond auction scheduled for this week to February. The Centre was earlier scheduled to borrow R12,000 crore through sale of three bonds on Friday, which now it will borrow on February 22.
The yields on the 10-year 8.15%, 2022, bond slipped below 8% intraday and ended at 7.99% on Tuesday.
The government will borrow R2 lakh crore from the bond market in October-March, out of which it will raise R60,000 crore in the January-March period.
Recently, finance minister P Chidambaram said the government is unlikely to borrow over and above the budgeted amount from the bond market.
Besides the optimism over the market borrowing, expectations that the Reserve Bank of India will cut the repo rate at its January policy review have also gathered steam.
The lack of supply is clearly a major reason. But I think the rally is driven by sentiment or expectation of rate cut. I think now people are fairly certain that a rate cut is coming in January, said P Mukherjee, head of treasury at Axis Bank.
RBIs decision to buy R8,000 crore worth of bonds through open market operations in a week sans bond supply gave further fillip to bonds, dealers said.
RBI has in past typically announced OMO bond auctions in weeks wherein a bond sale is scheduled under the governments borrowing programme.
The central bank had discontinued OMO bond purchases in July to resume them in December as liquidity deficit was beyond the state comfort level of 1% of bank deposits.
Bank borrowings through the central banks daily repo tender have remained well above the R1 lakh crore mark, indicating the worsened liquidity deficit condition.
This high liquidity deficit and the imminent supply through auctions may deter continuous buying and prevent a further fall in bond yields, dealers said.
There will be periodic corrections in the bond market, no rally is one-way, said Pradeep Madhav, managing director of STCI Primary Dealership.