Bond yields fall to a year's low

The yield on 10-year benchmark bond slid five basis points to 8.41%, the lowest since Sept 2013

Government bond yields dropped to a year's low on Wednesday on speculation a decline in global oil prices would aid the Reserve Bank of India (RBI)'s efforts to curb inflation.

The yield on the 10-year benchmark bond slid five basis points to 8.41 per cent, the lowest since September 2013. On Thursday, yields might see some correction, as RBI, after market hours on Wednesday, announced a government bond sale would be held on Monday, through open market operations. "The 10-year bond yield might rise a few basis points tomorrow (Thursday). The rise in yields might be up to five basis points," said a bond trader at a state-run bank.

Brent crude oil prices have fallen three per cent this month, reducing the risk of rising consumer price inflation in India, which imports about 80 per cent of its oil. The central bank aims to reduce Consumer Price Index-based inflation to six per cent by January 2016. Since September last year, RBI Governor Raghuram Rajan has raised the repo rate (the rate at which banks borrow funds from RBI) thrice to tame inflation.

"The decline in crude oil prices is certainly aiding sentiment, but we need to see how long this party lasts," said Harihar Krishnamoorthy, treasurer at FirstRand Bank. In the recent past, traders have resorted to buying bonds with maturities exceeding 10 years, as they feel these will provide better returns when interest rates start falling.

Meanwhile, one-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, dropped four basis points to 8.38 per cent, the lowest in two months.

Debendra Kumar Dash, a fixed income trader at DCB Bank, said, "Oil is definitely a factor, but the market is also benefiting from increased demand for debt, as there's ample cash supply in the financial system."

Sale of G-sec worth Rs 10k cr

RBI will conduct sale of government securities worth Rs 10,000 crore through open market operations (OMOs) on Monday. The move is intended towards sucking out excess liquidity, responsible for rising yields in government bonds.

As part of OMOs, RBI will sell four government securities maturing in 2017 (bearing interest rate of 8.07 per cent), 2021 (8.79 per cent), 2026 (8.33 per cent) and 2027 (8.28 per cent).