Yields government securities are likely to fall due to change in the stance by the Reserve Bank of India. Experts expect the the bench 10 year government bond to ease by nearly 15 basis points by the end of current quarter. The Monetary Policy Committee’s (MPC ) decision to change its stance to “neutral” from “withdrawal of accommodation” has boosted the market expectations of a domestic rate cut in December.
“By December end, the yield on the 10-year benchmark is expected to touch 6.60% if geo-political conditions does not escalate further. Now the steepening(fall in shorter end yields faster than longer-end) has started, which is expected to peak in December,” a dealer with a primary dealership said.
Owing to strong domestic macro economic factors and well-balanced inflation and growth parameters, the MPC unaninmously decided to change the stance. For the money market participants, a change in stance is a cherry on the cake after FTSE Russell announced the inclusion of government bonds in its Emerging market index.
With change in stance, the money market participants are confident over a cut in the domestic policy rate, firming up the demand for the short-term papers. As and when rate cycles begins to ease, traders start placing aggressive bets on the shorter end of the curve. consequently, going forward, the yields on the short-term papers are expected to fall faster as compared to yields on the long-term papers, techically referred to as steepening of the curve, dealers said.
“Shift to neutral stance increases the probability of rate cuts by RBI in this fiscal year. It is an acknowledgement from the policy makers that rates have peaked and they are looking for cues for rate cut. There is a strong case that repo rate may go to 6.00%, creating a sharp case for the 10-year going to 6.60%. But global cues needs to watched carefully,” Abhishek Upadhyay, senior vice president, economist at ICICI Securities Primary Dealership.
Moreover, with inclusion of government bonds in global indices, foreign investors have stepped up purchases in the 3-year to 14-year segment, which is their preferred segment, leading to a fall in yields. In a backdrop of this, a change in stance is likely to make this segment more lucrative, and with already active participation from the foreign investors, domestic players are also expected to follow the suite.
Post the change in stance, the cut-offs on the 91-day T-bill, 182-day T-bill, and 364-day T-bill has significantly come down. T-bills cut-offs plunge to a multimonth low of 6.40% on the Reserve Bank of India canceling last two T-bill auctions for the Jul-Sep. Going forward, term premium, difference between 3-months T-bill and 10-year government bond is expected to widen as cut-offs on the 3 month T-bill is expected to fall further, dealers said.
The change in stance also has a ripple effect on the commercial paper and certificate of deposits have eased significantly just after the announcement of change in stance. “T-bill rates have gone down substantially, CDs rate has seen a sharp fall of around 15 basis point. 1-year CD, which is use to happen around 7.65% level, today after the stance change, HDFC CD was issued at 7.50%,” a dealer with the private bank said.
Further, overnight money markets are also expected to hover between the standing deposit facility and the policy rate against the trend of hovering around between marginal standing facility rate and policy rate, dealers said. At the same time, liquidity in the banking system is anticipated to remain in surplus as government spending which was muted in the Jul-Sep quarter is expected to pick up this quarter, leading to further ease in money market rates.
In contrast to shorter-tenure papers, demand for long-term bonds is expected to be weaken owing to slightly higher supply in government bonds with a maturity above 20-years as indicated in the borrowing calendar for the second half of the financial year. Moreover, higher supply of state development loans, which are generally long-term bonds, is likely to dampen the demand for long-term bonds. States usually borrow higher than their indicative calendar in the second half of the financial year.