Govt bond yields likely to stay at present level

The yield on government bonds may stay at present levels, consolidating a trend of drop seen last Friday.

A treasury executive and traders said markets reacted to the comments by Reserve Bank of India (RBI) officials on an imminent change in the rate cycle and negative food inflation. Hope of a rate cut or a step to improve liquidity in the third-quarter policy review may keep yields around the present level.

The yield on 10-year benchmark government bonds dipped to 8.22 per cent at close on Friday, as cut-off at the bond auction was in line with market expectation. On Thursday, it closed at 8.33 per cent.

For the week, the 10-year bond yield was down by 34 basis points from last week’s close of 8.56 per cent.

Sounding a note of caution, a senior treasury official with an associate of State Bank of India said the low-yield level may not sustain as RBI was preparing the market for cut.

On Friday, Economic Affairs Secretary R Gopalan said there was a “very good possibility” of the RBI cutting interest rates if December headline inflation numbers fell sharply. Food inflation for the week ended December 24 turned negative to (-) 3.36 per cent. It stood at 0.42 per cent in the previous week. It was 21 per cent in the corresponding week of 2010.

Call rates
The interest rate in the inter-bank overnight market may open firm as most banks would prefer borrowing earlier in the week, dealers said. The call rate is seen opening at 8.8-8.9 per cent, and may move in the 8.6-8.8 per cent range.

Banks may also borrow funds for payment towards government bonds, worth Rs 14,000 crore, purchased in auctions held on last Friday.

Bank borrowing at the Reserve Bank of India’s liquidity window is pegged above Rs 90,000 crore on Monday. On Friday, banks borrowed Rs 92,370 crore.