Bond yields, rupee seen up in short trading week

Government bond yields may harden this week, as traders will sell existing papers to make room for new issuances in the holiday-shortened week. The Reserve Bank of India (RBI) will auction a new security in 13-year maturity this week.

Last week the yields on the ten-year benchmark government bond closed at 8.97 per cent, 12 basis points higher than the close a week ago. The cut-off yield at the auction of new ten-year benchmark government bond was at 8.79 per cent.

“There will be demand for new papers and dealers may cut positions to accommodate them,” said a treasury official of a public sector bank. RBI will auction Rs 13,000 crore of dated government securities on Friday. Money markets will be closed on Monday for Id-ul-Zua and on Thursday for Guru Nanak Jayanti.

Expectations of higher foreign institutional investment in government debt being allowed may keep a check on rising bond yields. RBI Deputy Governor H R Khan last week said RBI would take calibrated approach to increase FII cap, which is at $10 billion at present.

According to the revised borrowing plan, RBI will auction Rs 2.2 lakh crore in the second half of the current financial year. Higher-than-planned borrowings for 2011-12 have pushed bond yields to a three-year high and an increased foreign participation in government debt may help cool off yields by creating fresh demand.

The interbank call money rate may inch up as banks will borrow funds to meet reserve requirements at the start of reporting fortnight. The call money rate ended at 8.39 per cent on Friday. Last week, banks on an average borrowed Rs 42,820 crore daily from RBI.

Rupee may appreciate this week, as banks are likely to sell the dollar if the Group of 20 nations’ meeting comes up with a concrete solution to resolve the euro zone debt crisis. “The market will be closely watching the G-20 meetings, on the basis of which we can see further volatility in the market,” said India Forex Advisors in a note.

A holiday-shortened week will help limit the domestic demand from importers for the dollar. The Indian currency lost 0.7 per cent last week and closed at 49.11 against the dollar.