Bond yields seen up on borrowing concerns

Rupee may stay under pressure

Yields on government bonds may edge up this week as markets await another round of fresh supply of government securities. According to the issuance calendar, the Reserve Bank of India (RBI) will auction Rs15,000-crore bonds on Friday.

Yields on the 10-year benchmark government bond closed at 8.62 per cent on Thursday. The bond was not traded on Friday under the ‘shut’ period as coupon payment on the security is due on Tuesday. This week, yields are seen in the range of 8.55-8.65 per cent, said traders. Last week, the government had raised Rs 18,000 crore via sale of dated securities.

Also, there are expectations of the government issuing a new 10-year benchmark bond as the current security may turn illiquid soon. According to data from RBI, Rs 70,000 crore worth of bonds have been issued so far under the security that carries a coupon rate of 8.79 per cent and matures in 2021. Typically, a bond turns illiquid after it crosses issuance of Rs 60,000 crore, though there is no regulatory limit on the amount that can be raised under one security.

This week, there are inflows of about Rs 2,000 crore lined up in the form of redemptions and coupon payments. Last week, inflows of Rs 37,000 crore flowed back into the system as the government redeemed maturing bonds. This eased liquidity pressure from above Rs1 lakh crore between Monday and Thursday to Rs 51,000 crore on Friday.

Improvement in liquidity conditions may help bring down overnight call rates. However, demand for funds on the start of the new reporting fortnight may keep the pressure on call rates.

Rupee is expected to stay weak in the short run as RBI’s measures to increase inflows will yield results over the medium term. On Friday, RBI deregulated interest rates on the export credit in foreign currency and raised the interest rate ceiling on Foreign Currency Non-Resident Deposits.

The measures came in after the rupee inched closer to all-time lows in intra-day trade on Friday. RBI intervention and profit booking by exporters helped the rupee recover from the intra-day low of 53.92 a dollar to close at 53.48, just seven paise lower than on Thursday.

“Rupee may cross all-time lows soon in the absence of aggressive intervention from the central bank,” said a forex dealer with a public sector bank. Rupee had touched an all-time low of 54.3 per dollar on December 15, 2011.