Short, Medium Yields Have Drooped 160 Bp This Fiscal
Yields on government securities in the short and medium end have dropped by 160 to 170 basis points, while those in the long end have gone down by 100 basis points since the beginning of this fiscal resulting in a drastic shift in the yield curve.
In tandem with the fall in yields, the spreads of gilts over the benchmark repo rate and bank rate too have declined to historically low levels. The spreads are at present 210 basis points above the seven per cent bank rate and 260 points over the 6.50 per cent repo rate.
The 10-year benchmark government security is currently trading around 9.10 per cent as against 10.40 per cent at the beginning of the fiscal, Credence Analytics said in its report. It pointed out that in the past 10 year, yields have been traded at 325 to 350 basis points above the bank rate.
While the prediction of a 100 basis points cut in the bank rate to six per cent starting next month when the busy season starts, the report pointed out that there was still room for the yields to decline. The reason cited is that the investors were not yet willing to take risks in the equity markets and so funds will continue to flow into the debt market through safer avenues of bank deposits.
In the current economic climate where there are hardly any viable investment options most of the funds in the banking system have made a beeline into the gilt market and their investments in these instruments have risen by 22 per cent on year-on-year basis. Abundant primary supply of government papers has only added to the increased investment in these papers.
Activity in the secondary market for gilts too has increased tremendously. The volumes in the first five months of this fiscal is at Rs 4,61,027 crore compared with Rs 1,58,136 crore in the corresponding period of the previous fiscal.
The 12.89 per cent fall in the tax revenue in the first quarter of 2001-02 at Rs 32,418.89 crore as against Rs 37,217.16 crore in Q1 of 2000-01 coupled with the shortfall in the Rs 12,000-crore disinvestment are expected to widen the fiscal deficit budgeted at Rs 1,16,314 crore, the report said. This could lead to a slippage of Rs 30,000 to Rs 35,000 crore in the fiscal deficit, it said.