Yields drop to two-week low on rate cut speculation

Expectations of further reduction in interest rates saw the yield on 10-year government securities drop to their lowest level in nearly two weeks.

Besides, there are expectations that with a clear mandate, the Centre will be able to rein in fiscal deficit by restarting the process of sale of stake in public sector companies and cut down on some wasteful expenditure.

As a result, the yield on the 6.05 per cent government security due in February 2019 dropped by 12 basis points to 6.30 per cent on Monday. The price rose 0.85 to Rs 98.18 for papers that have a face value of Rs 100 each.

In a newspaper interview, Prime Minister Manmohan Singh had suggested that there was a need for an improvement in the stimulus packages announced by the government and the Reserve Bank of India so far. He had also said that he was in talks with RBI on the issue. This has raised expectations that there will be further measures initiated jointly by the central bank and the government to boost economic activity.

RBI has projected that the economy will grow by 6 per cent during the current financial year after expanding by 9 per cent or more for three years. During 2008-09, however, the Indian economy grew by 7.1 per cent, mainly on account of the adverse global economic environment and its impact on India.

In a report Citi said that it expected a 50 basis point reduction in policy rates though the fiscal deficit, budgeted at 5.5 per cent during the current financial year, remained a stress point.

In a note, Nomura, however, said, “Given that sustained excess liquidity can stoke inflation, we expect the RBI’s exit strategy to start with the issuance of market stabilisation scheme (MSS) bills as early as 4Q09, followed by a CRR hike of 100bp and later a hike in the repo/reverse repo rates by 75bp, both in 2010.”

Traders, however, said that they expected further rate cuts, especially because inflation was low.

Since October, following the global credit crisis intensifying, RBI has slashed benchmark rates six times.

On April 21, the central bank last lowered the repo rate, the rate at which it lends to banks, and reverse repo rate, the tool used to suck out liquidity, by 25 basis points each to 4.75 per cent and 3.25 per cent respectively.

According to Bloomberg data, the cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, fell. The rate, a fixed payment made to receive floating rates, declined to 5.51 percent from 5.68 percent on May 15.

Call rates up
Call rates went up marginally but stayed below 3.20 per cent due to surplus liquidity in the system.

In a statement, RBI said that banks parked Rs 1,26,985 crore through the reverse repo window as demand for funds remained low.

According to data on the Clearing Corporation of India website, the weighted average rate was 3.18 per cent, as against 3.11 per cent on Friday. Rates hovered between 1 per cent and 3.35 per cent and closed at 3.30 per cent. Volumes were estimated at Rs 141 crore.

In the collateralised borrowing and lending obligation (CBLO) segment, the weighted average rate rose to 2.57 per cent on Monday from 1.14 per cent on Friday.