Government bond prices surged across the curve On Thursday on hope that slowing economic growth, problems in credit delivery to industry and the need to maintain comfortable liquidity could prompt the Reserve Bank of India (RBI) to cut interest rates at the earliest.

The most traded 8.24%, 2018 gilt ended at Rs 106.57 or 7.2633 per cent yield-to-maturity, after surging by over Rs 1.50 intraday to touch Rs 107.

Money market entities expect RBI to cut reverse repo as well as repo rate by 50 basis points each to bring them down to 5.50 per cent and 7 per cent, respectively. Suresh Tendulkar, head, Prime Minister’s Economic Advisory Council, also recently said there is scope to cut the repo rate and even the reverse repo rate could be brought down.

Several private forecasters have pegged India’s economic growth for 2008-09 (April-March) in the band of 7-7.5 per cent and RBI has also scaled down its own estimate to 7.50-8.0 per cent from 8 per cent.

Some bond traders even expect banks’ cash reserve ratio, currently at 5.50 per cent, to be brought down further to maintain comfortable interbank liquidity amid heavy intervention in foreign exchange market.

RBI’s foreign exchange reserves have declined by $58 billion so far in 2008-09 (April-March) reflecting heavy intervention by the central bank.

Log-term bonds
Prices of bonds in 15-year, 25-year and 30-year segments have risen by over five rupees in the last one week.

On Thursday, the 7.95 per cent, 2032 bond gained Rs 1.21 at Rs 101.42 and Rs 4.68 since last week. On November 12, the bond had closed at Rs 96.68.

The 8.33 per cent, 2036 gilt has risen Rs 5.34 and the 7.94 per cent, 2021 paper that will be sold at the auctions on Friday, has gained over Rs 5. The extent of the rise in prices has been more as the tenure increases in gilts, dealers said.

“The longer the tenure, prices are more sensitive to sharp movement. But the spread between the 10-year and the 30-year is still around 52 basis points. Historically, it has been around 40 basis points,” said Madhav of STCI Primary Dealership.

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