Bond yields may go up on worries over large govt borrowings

Yields on government bonds are likely to harden this week on worries over large government borrowings and lack of clear signals from the Reserve Bank of India (RBI).

Dealers said they expected the RBI’s open market operations (OMO) auction on February 19 to favour soft yields. But, RBI kept the cut-off yield for the most frequently traded 8.24 per cent 2018 paper at 6.25 per cent, higher than market expectations.

The high cut-off yield resulted in hardening of yields by 10-15 basis points across the curve, IDBI Gilts said in its note. The yield on the 2018 paper ended at 6.42 per cent on February 19 against 6.17 per cent a week ago.

Bank of Baroda chief economist Rupa Nitsure-Rege said, “Gilt prices are expected to remain under pressure next week as the results of the OMO purchases would continue to weigh on sentiments. Any monetary action from the RBI in the course of the next four days may change the direction.”

There are also concerns over the huge supply of bonds for managing massive government programmes and this has pushed the yields of gilts up, a dealer said.

Trading was shut on Friday due to a strike by the RBI employees and will be shut on Monday for a public holiday.

Rupee to stay soft
The rupee may remain soft as foreign portfolio investors continue to pull out from the equity market. The moderation in economic growth and fall in exports will also weigh on the rupee value against the US dollar, dealers said.

The rupee closed at 49.74 on Friday as against 48.64 a week ago.