With the Reserve Bank of India?s (RBI?s) control of liquidity likely to continue, treasurers say bond yields could hit the 8% mark over the next six months. While credit off-take by the private sector may not pick up much, the estimated net government borrowings in 2010-11 of Rs 3.32 lakh crore could pressure yields. ?If the government borrows as planned, we could see bond yields at 8% in six months? time,? said Kotak Mahindra Bank group treasurer Mohan Shenoy.
Added Standard Chartered Bank MD for South Asia financial markets Ananth Narayan, ?We believe there will be some more tightening by RBI. Moreover, while government borrowings are high, the fact that the 3G auctions could be postponed is not good news. Also, should risk aversion rise worldwide, the government may not mop up the kind of money that it had hoped for through disinvestment.?
Meanwhile, central bank governor Duvvuri Subbarao on Monday warned that bond yields would be under pressure if the government borrowed more than RBI expected it to in 2010-11. Subbarao was talking to analysts and economists from Chennai.
?The finance minister has indicated the fiscal deficit next year will be 5.5% of GDP. On that basis, we believe that the absolute amount of borrowing next year will be comparable to the absolute amount of borrowing this year. In gross terms, it might be slightly higher because of fewer redemptions. While there are some challenges, we are hoping that the borrowing will be as we expect it to be,? Subbarao said.
The last time bond yields hit 8% was nearly two years ago, in April 2008.The ten-year benchmark traded at a yield of 7.63% on Monday, at levels higher than those of Friday, after RBI announced a higher-than-expected 75-basis point hike in cash reserve ratio.
Treasurers say they are keeping a close watch on the Union Budget for 2010-11 to get a clearer picture of where yields could be headed. In the meantime, most expect short-term yields to harden given advance tax outflows in mid-March. Indusind Bank head of global markets J Moses Harding believes banks would prefer to stay invested in the short end of the curve given the expected rise in yields.
Treasurers also believe that RBI might help banks by attempting to bring about some yield stability by issuing floating rate bonds linked to the six-month T-Bill yield. On February 5, the government will auction bonds worth Rs 8,000 crore, the last auction for 2009-10.
