10-Year Yield Flops To 8%

Yields of 10-year government paper dipped to a historic low of 7.99 per cent today from yesterday's 8.12 per cent, on the back of liquidity overhang in the system. The 15-year paper yield dropped by 16 basis points to 8.24 per cent. Security prices at the medium and long end of the market were up Rs 1-1.30.

With today's fall, the yields of the 10-year and 15-year papers are down by 106 basis points and 150 basis points, respectively, since the beginning of the month. Since the beginning of the financial year, the yields of both the papers are lower by 226 basis points and 306 basis points, respectively. However, medium term papers have not seen such a steep fall in yields.

Said a primary dealer: "It was a liquidity-driven rally. The interest rates had been soft since the beginning of the financial year and it went down sharply since the credit policy due to the cut in the bank rate and the cash reserve ratio (CRR)." The Reserve Bank of India (RBI) cut the bank rate by 50 basis points to 6.50 per cent and the CRR by two percentage point to 5.50 per cent in its October credit policy.

The excess liquidity in the system reflected in the call money market as the overnight rates closed below the repo rate of 6.50 per cent.

A dealer with a foreign bank said: "The RBI governor had recently expressed his comfort over the fall in yields. It has boosted the market further and the yields have been falling even sharper after that."

The banking system is flooded with deposit money but is short of credit opportunity because of industrial slowdown and this forced the banks to park huge amount of liquidity in the government security market. The aggregate lending to the commercial sector (including the credit through debt paper) in the current financial year till November 2 stood at Rs 26,059 crore compared with Rs 36,656 crore during the comparable period in the last fiscal.

On the other hand, deposit mobilisation till November 2 in the current fiscal was Rs 89,986 crore compared with Rs 74,986 crore during the corresponding period in 2000-01.