Yields on the 10-year benchmark government security eased 11 basis points in the past week, as markets factored in expecations on the start of a monetary easing cycle.
The yields eased ahead of the Reserve Bank of India (RBI)’s Annual Monetary and Credit Policy on April 17.
“Bond markets have factored in a rate cut of about 25 bps,” said Vivek Rajpal, Nomura’s India rates strategist. “What matters now is the kind of signal RBI gives on further rate cuts.”
On Tuesday, yields on the 10-year benchmark bond closed at 8.6 per cent. Yields had spiked to a four-month high of 8.78 per cent last week, on partial devolvement of the first government bond auction.
The markets will look for guidance from the central bank on factors that will affect policy actions. “If there is an indication that RBI may go for a pause after a rate cut in April, yields may start moving up again after some relaxation,” said a senior treasury official of a private sector bank. Currently, the repo rate is 8.5 per cent.
After raising the policy rate 13 times since March 2010, the central bank has kept the repo rate unchanged since October 2011. It announced a reduction of 125 bps in banks’ Cash Reserve Ratio in two tranches, in January and March 2012, citing liquidity pressure. A section of the market expects a further CRR reduction from the current 4.75 per cent.
A senior official of a large public sector bank said there were more chances of a CRR reduction as against a repo rate cut, as liquidity would create an issue. This, he said, would help if the central bank didn’t wish to conduct open market operations (OMOs) right at the beginning of the financial year.
“The supply-side concerns remain valid, and despite higher yield, investor appetite is low,” said Moses Harding, head of economic and market research at IndusInd Bank. He said RBI needed to give a clear road map on liquidity, cost of liquidity and OMOs in the policy review. Of the Rs 5.79 lakh crore pegged for the current financial year, the government will borrow 65 per cent in the first half itself.
While reduction in CRR will help cool short-term (up to one year) rates in the debt market, a policy rate cut will ensure softer yields on longer term maturities. A bond dealer with a domestic brokerage said corporate borrowing was also on hold, as issuers were expecting a cut in policy rates.
No major corporate bond issuances have taken place so far in the current financial year, whereas the government has already raised Rs 18,000 crore and announced another auction of Rs 15,000 crore this week. “Traders are also not taking positions on corporate bonds, as they are considered relatively illiquid,” said the dealer.