The worst may be over for the debt market

 Mahesh Nayak        Last Updated: June 17, 2013  | 17:23 IST

Mahesh Nayak
Mahesh Nayak
Bonds rallied after receiving the news that there will be less borrowing from the central bank. This means there will be a sizeable infusion of money into the debt market. In the afternoon trades, the 10-year 7.16 per cent 2023 government securities (G-Sec) were trading at 7.23 per cent (Rs 99.39) down nine basis points (bps) from its Friday close of 7.32 per cent (Rs 98.92). The yield on 10-year G-Sec, after opening flat at 7.32 per cent ahead of the credit policy announcement, touched an intra-day low of 7.22 per cent (Rs 99.47), thus moving in the range of 10 bps.

The Reserve Bank of India in its monetary review on Monday (June 17) left policy rates unchanged.

Though the Reserve Bank of India (RBI) didn't cut rates the bond market has rallied as the worst seems to be over for it. The move of keeping rates unchanged was largely anticipated by market participants after the recent weakening of the rupee, which was also due to huge selling from the foreign institutional investors (FIIs) who have sold close to $3 billion worth of Indian bonds in June so far. This saw the yield on the new 10-year G-Sec, after hovering around 7.14-7.17 per cent, touch a high of 7.35 per cent on June 12, 2013.

The change in tone of the RBI governor comes as a positive surprise and increases hopes of a rate cut. Interestingly if one compares the yields of the 10-year G-Sec today and that of three years back, yields today are trading lower. The 10-year G-Sec yield was around 7.50 per cent in June 2010, 22 bps higher than Friday's closing of 7.32 per cent. However the Thomson Reuters Jefferies CRB Index (a commodity index) in rupee terms is nearly up by 25-26 per cent since 2010. This indicates that despite steep rise in prices, the rates are lower.

Though inflation, particularly energy and food inflation, is still a big cause of concern for the policy makers, the slowdown in the economy makes the probability of RBI cutting rates in future high. This has also been evident from Monday's (June 17) rally in the bond market. While concerns over fiscal deficit and inflation may put pressure on yields that may firm up (up to 7.50 per cent) on the excess supply, the news of lower borrowing by the RBI has added a new lease of life which increases the chance of yields falling below seven per cent rather than rising in the coming days.

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