The money markets remained tight on Friday though the R13,000-crore auction of gilts went through successfully, barring a small amount, which devolved on primary dealers.The yield on the benchmark bond may have risen 2 basis points on Friday to 8.81%, but bonds have now rallied for a third straight week on expectations that the Reserve Bank of India (RBI) will pause and not hike interest rates further.
The yield on the benchmark 10-year bond closed at 8.81% from 8.79% a day earlier. The borrowing from the RBI’s repo window dipped below R 1 lakh crore for the first time this week with banks picking up R98,775 crore on Friday. However, the current liquidity shortage in the banking system is nearly double the central bank’s comfort level of R55,000 crore.
The RBI on Friday auctioned bonds due in 2024, 2040 and a floating rate bond (FRB) due in 2020 mopping up just short of R13,000 crore. The 2024 and 2040 auctions went through successfully while the FRB auction saw a devolvement of R103 crore. The cut off yields on the 2024 and 2040 bonds came in at 8.99% and 9.28% respectively in line with the secondary market yields on the respective securities.
?The auction for the two fixed rate bonds went through successfully while the devolvement in the FRB was small. Also, the open market operation (OMO) on Thursday was largely successful as the central bank offered good yields. These are all positive signals for the bond market,? said NS Venkatesh, head of treasury at IDBI Bank.
Said J Moses Harding, EVP, IndusInd Bank, ?Supply of new paper, tight liquidity and bond buyback are the factors that are dominating the bond market currently. The yields will come down whenever the central bank will announce OMOs while they could rise ahead of bond auction.? Harding expects the yields to remain in a range between 8.75% and 8.90%.
The additional supply of paper following the government’s decisions to borrow R52,800 crore more than it had earlier planned, in the second half of 2011-12, had pushed up benchmark yields to three-year highs of close to 9%. Only one of the seven auctions conducted in the second half of the year so far has gone through without a devolvement.
Meanwhile, the auction of $ 5 billion worth of gilts to foreign institutional investors (FIIs), scheduled for November 30, could ease the pressure on bond yields. The government has raised the ceiling on FII investment in government and corporate debt by $5 billion each to $15 billion and $20 billion respectively.