Bond market traders, however, cheer efforts towards deepening the market through structural changes
Government bond yields jumped 7 basis points on Tuesday in the absence of any short-term relief from the Reserve Bank of India by way of an ease in policy rates or reserve ratios, but bond traders appreciated the central bank’s efforts in deepening the market through structural changes.
The yield on the benchmark 8.24%, 2024 bond ended at 7.79%, marginally up from 7.72% on Monday. The 10-year bond yield had eased by 5 bps over the last two trading sessions. Traders expect yields to rise further as the government begins its market borrowing programme through auctions.
The government will borrow R3.6 lakh crore from the bond market during April-September, which is 67% of the total borrowing for 2015-16. The RBI will sell bonds worth R16,000 crore through an auction later this week and traders expect the cutoff yields to be lower given that the central bank has indicated that its accomodative monetary policy stance will continue.
The central bank kept its repo rate unchanged at 7.50% and also kept the Cash Reserve Ratio and the Statutory Liquidity Ratio unchanged at 4% and 21.5% respectively. The RBI said that accomodative stance would be maintained going forward but measures would be contingent upon economic data.
“Monetary policy has not entered a sustainable dovish phase, bond yields could move up a bit as supply is coming,” said Mohan Shenoi, head of treasury at Kotak Mahindra Bank.
Bond traders said that although most in the market expected the RBI to keep rates unchanged, a section of the market was hoping for some relief on the liquidity front, either by way of relaxation on daily maintenance of Cash Reserve Ratio or even a cut in the CRR itself. At present, banks have to maintain 95% of the CRR balances on a daily basis and maintain 4% CRR on the reporting day. “Positions had been built up over the last couple of days on expectations of a CRR cut. Since this was absent, traders had sold off which led to the yields rising,” said the head of a primary dealership.
The central bank has proposed that primary dealers must act as market makers and help increase trades in turn illiquid securities. “This is a good move. When the PDs were set up, the intention was to have a broad spectrum of securities on the yield curve. Currently more than 20-25 securities are being traded compared with just 3-5 securities earlier, which is a sign that liquidity in the market is increasing,” said Pradeep Madhav, managing director of STCI Primary Dealership.
Further, to increase retail participation, the central bank has proposed to introduce web-based platform and alternate channels of distribution. The non-competitive bidding segment through which retail investors can participate in auctions of government bonds will be extended to Treasury bills as well, the RBI said.