Bond yields set to fall as RBI cuts auction size

The fall in yields would help reduce the govt's cost of borrowing

Government bond yields are set to fall further on Tuesday, as the Reserve Bank of India (RBI) would auction such bonds for a notified Rs 10,000 crore this week, instead of Rs 15,000 crore, as stated in the issuance calendar for marketable dated securities released in March.

The yield on the benchmark 10-year 7.16 per cent government bond ended at 8.46 per cent on Monday, compared with its previous close of 8.6 per cent. The fall in the yield resulted from fresh buying interest from traders and stability in the rupee against the dollar. Volatility in the rupee was much higher in the recent past, owing to which bond yields had risen.

“Tomorrow, the yield on the 10-year government bond may trade in the range of 8.35-8.5 per cent and the bias is more towards yields falling,” said S Srinivasaraghavan, head of treasury, Dhanlaxmi Bank.

According to government bond dealers, the next few days would see redemptions of about Rs 45,000 crore, which would help boost the sentiment in the bond market. The fall in yields would help reduce the government’s cost of borrowing.

In the auctions held in the last few weeks, there was partial devolvement on primary dealers, as the market appetite for bonds was drying up due to a liquidity crunch and a rise in government bond yields.

On Friday, RBI would auction two government securities, instead of four announced in March. The auction would be conducted through a uniform price method.