Bonds on Friday reversed their losses with the yield on the benchmark dropping to a low of 7.265% in intra-day trades before closing the session at 7.326%. On Thursday, the yield had closed at an 18-month high of 7.396% with bonds selling off sharply after the government said it would borrow an additional Rs 50,000 crore via dated securities. Meanwhile, the Reserve Bank of India (RBI) did not accept any bids for two sets of government securities (GS) amounting to Rs 11,000 crore at the weekly auctions. As a result, only Rs 4,000 crore of supply hit the market, out of the planned borrowing for the week of Rs 15,000 crore. The smaller quantum of sales cheered the market. On Friday, the central bank did not accept any bids for two sets of bonds — 6.84% GS 2022 and 6.68% GS 2031 — amounting to Rs 3,000 crore and Rs 8,000 crore, respectively. The other two bonds — 6.57% GS 2033 and 7.06% GS 2046 — were auctioned to raise Rs 2,000 crore each. Money and currency market expert Ananth Narayan said the RBI was playing the role of merchant banker to the government. “It has this dual role. The first is to decide on the monetary policy and it has to also make sure the cost of borrowing for the government does not go up too much. Over the last few days, there has been a runaway fall in the prices with a rise in the yields. As a good merchant banker, the RBI is trying to manage the process,” Narayan said.
Narayan also indicated that in the short term, there could be some respite for the bond market as fresh foreign portfolio investor (FPI) investment limits are set to be introduced. “The new 10-year bond is likely to be launched. We generally see money chasing fresh bonds in anticipation of new 10-year being issued. That should see a dip in the 10-year yield,” he said. Fresh FPI investment limits worth Rs 17,001 crore in corporate bonds are set to be introduced in January. Of this, Rs 7,501 crore or close to $1.2 billion will be made available to the general category FPIs — the most active segment among foreign investors. Fresh limits will also be opened up in the central government securities where general-category FPIs will get an additional limit of Rs 1,600 crore. However, experts also note that any rally could be temporary since the fundamental concerns over additional supply, inflation and oil prices still persist. Brent oil has consistently remained above the $66 per barrel level this week while US bond yields have also been hovering around the 2.42% level. Dealers said the markets could face some negative news such as a shortage of liquidity and higher inflation. Moreover, the government was likely to announce more schemes, requiring spending, with elections scheduled for 2019 . As such, yields on bonds were likely to head up towards 7.5% despite no increases in rate hikes by the central bank.