Yield on benchmark government securities eased more than 5 basis points on Monday after the announcement of completion of switch or conversion transaction by the government and the Reserve Bank of India (RBI). The sentiment of traders also improved after the Economic Survey 2021-22 said the fiscal deficit targets for FY22 would be met.
The new 10-year benchmark 6.54%-2032 bond yield ended 8 basis points down at 6.6841%, compared to 6.7688%. The old benchmark 6.10%-2031 bond yield ended 6 basis points down at 6.6829%, against 6.7527% at the close of the previous trading session.
“The market reacted to the Economic Survey and other events like the Budget scheduled for tomorrow, and the RBI monetary policy next week. This kind of volatility in these circumstances is not unusual and we expect the same to subside as the news flow around these major events starts happening,” said Ajay Manglunia, MD and head – institutional fixed income at JM Financial.
On Monday, the government did conversion or switch operations with market participants as well as with the RBI to minimize the redemption and reduce pressure on market borrowings. The conversion transaction was done with the RBI on January 28 for an amount of Rs 1,19,701 crore. Market participants said switching with the RBI reduces duration pressure in near term.
“The switch announcement is an obvious positive for the market as it directly impacts the government’s cash flows. Markets are also expecting some announcements in the Budget that will speed up the inclusion in global bond indices,” said Anand Nevatia, fund manager, Trust Mutual Fund.
Market participants expect the government to keep the borrowing between Rs 12.50 lakh crore and Rs 13 lakh crore for the next fiscal in the Budget. However, bond yields are expected to rise in near term as interest rate cycles are turning. “We expect bond yields to continue to rise as the interest rate cycle is turning not only domestically, but also globally, and we do not expect any major support from the RBI in FY23,” said Puneet Pal, head – fixed income, PGIM India Mutual Fund.