Yields end lower as RBI takes sting off rate shock

Jan 29 2014, 03:53 IST
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SummaryCaution ahead of FY15 govt borrowing programme, fiscal deficit target may keep upward pressure on yields.

Government bond yields swung 15 basis points before settling marginally lower after the Reserve Bank of India (RBI) unexpectedly hiked the repo rate by 25 bps to 8% on Tuesday. The yield on the benchmark 10-year 8.83%, 2023 bond settled at 8.75% on Tuesday, lower than the previous close of 8.77%.

The 10-year yield had hit a day's high of 8.84%, reacting to the RBI's rate hike. However, bond investors resumed buying ater the central bank's policy guidance suggested that more rate hikes are unlikely. Consequently, the 10-year yield slipped to 8.75%.

In the policy statement, governor Raghuram Rajan reduced the sting from the rate hike by saying that if the disinflationary trend is consistent with RBI's expectations, further tightening may not happen. Given the softer policy stance and the fact that scheduled bond auctions will conclude by mid-February, yields could ease towards March, dealers said.

“Given the guidance and the fact that inflation continues to come off, I think the market expects CPI to come down to 8.5% by March. So, this is seen as a dovish guidance from RBI,” said Ananth Narayan G, co-head of wholesale banking and head of global markets, Standard Chartered Bank.

Nevertheless, caution ahead of the 2014-15 government borrowing programme and the fiscal deficit target will keep upward pressure on yields. The 10-year bond yield is unlikely to ease below 8.50%, dealers said.

“One could see some rally in bond yields over the next 2-3 weeks, till such time we get into the government borrowing programme phase and the market starts digesting the information around the next year's borrowing programme, which is likely to be pretty large even if the fiscal deficit projections are to be met,” said Neeraj Gambhir, managing director and head of fixed income, Nomura Securities.

In 2014-15, more than Rs 1.5 lakh crore worth of government bonds will mature, which is expected to inflate the gross borrowing of the government. For 2013-14, the gross borrowing is Rs 5.79 lakh crore, out of which the government is yet to borrow Rs 40,000 crore.

“I think the uncertainties which are there, both globally and locally, will keep bond yields from falling too much. I don't see the 10-year bond going below 8.50%,” said Ananth Narayan.

Bond traders would also watch the outcome of the US Federal Reserve's policy meet scheduled on Thursday as the decision on stimulus could swing foreign investors' interest. Foreign investors have so far bought $2.5 billion

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