Yields to moderate, says FM, hints at RBI action

Written by fe Bureau | Mumbai | Updated: Nov 20 2013, 10:50am hrs
Finance minister P Chidambaram on Tuesday said the recent rise in the yield on government securities (G-secs) was temporary and the rates could moderate with the help of some measures the RBI (Reserve Bank of India) will take.

Speaking to reporters at a press meet following the launch of the Bharatiya Mahila Bank, the minister indicated that if food inflation moderates in November (he hoped it would), a conducive RBI policy could be enabled.

Headline inflation had risen to an eight-month high of 7% in October, even as food inflation eased a bit to 18.19%.

This, coupled with consumer price inflation of above 10% in October has led to fears of a further rate hike by the central bank, which have also driven bond yields.

The yield on the 10-year 7.16% bonds due 2023 remained close to 9%, ending at 9.01% on Tuesday. Yield on the benchmark bond had hit a multi-month high of 9.15% last week due to tight liquidity conditions and a G-secs supply overhang.

Since then, yields cooled off a bit after the RBI bought more than Rs 6,000 crore worth of bonds through open market operations (OMOs).

"Given the response to the RBI's OMO and the fact that the absorptive capacity of the market is low with the supply being what it is, bond yields are unlikely to ease from current level," said Hitendra Dave, head of global markets at HSBC.

Bond prices and yields are inversely correlated with a fall in bond prices implying a rise in yields.

Many analysts, however, did not share the finance minister's optimism. There is unlikely to be any significant positivity for the bond yields in the near future with the inflation numbers still failing to come off in a significant way, Kotak Mahindra Bank chief economist Indranil Pan said in a note. The bank expects the RBI to hike the repo rate by 25 basis to 8% at its mid-quarter review in December.

The relatively high level of yields on benchmark bonds like the 10-year government bond has pushed up the cost of borrowing for the government and has also led to an increase in corporate borrowing costs in the market.

So far in 2013-14, the rise in bond yields has rendered the cost of borrowing 10-year money for the government dearer by a whopping 100 basis points.

The government borrowed Rs 3.49 lakh crore through bonds during April-September and is slated to borrow Rs 2.35 lakh crore during October-March.

Meanwhile, the government will issue a new 10-year bond through an auction on Friday and bond traders believe the coupon of this bond reflecting the cost of borrowing could be as high as 8.80%. This would be highest coupon for a benchmark 10-year bond since 2011.

Since the 10-year sovereign bond yield is used as a reference in the pricing of many products in both money and credit markets, cost of borrowing across the board has remained high. For instance, in the last three weeks, the 46 bps rise in government bond yields has driven up yields on corporate bonds by up to 40 bps. Cost of three-month borrowing through the commercial paper market has also risen by about 50 bps over the past fortnight to 9.55%.

While foreign institutional investors (FIIs) are not significant players in the domestic bond markets, selling pressure from FIIs has also in part been responsible for the higher bond yields.

In order to draw more foreign interest in Indian government bonds, the government and the RBI continue to look at ways to get India included in emerging market bond indices.

Chidambram said that one of the conditions put by global bond index compilers such as JPMorgan to include Indian bonds in the emerging market indices is to do away with the current investment limits of $81 billion for foreign investors. The government and the RBI are in discussions over the issue, he added.

Last week, RBI governor Raghuram Rajan had noted that FII exposure in the debt market both government and corporate had come down to $19 billion from $ 37 billion on May 21 before fears of a tapering in the US Federal Reserve's bond-buying programme hit the market, sending global yields higher.