Bond yields fall on short-covering; market still hopes for index inclusion

Call rate closes at highest since October 2019 as liquidity tightens

The yield on the 10-year benchmark government bond settled seven basis points lower on Tuesday, as some traders aggressively covered short positions and the market held on to the hope of inclusion of Indian sovereign debt in global indices, dealers said.

The 10-year bond closed at 7.29 per cent yield as against 7.36 per cent yield on Monday. Bond prices rise when yields fall and vice-versa.

While various media reports, citing sources, said that the inclusion of domestic bonds on the JP Morgan emerging market index had been delayed to next year, traders awaited the review of the FTSE Russell index due Thursday. FTSE Russell was among the indices that had placed Indian debt on a watch-list for possible inclusion.

Index providers typically complete their reviews by the end of September. Inclusion of Indian debt in a global index is seen attracting hefty capital flows over a year. A report last month by Goldman Sachs had pegged inflows for Indian debt through index inclusion at around $30 billion.

Such a magnitude of flows would go a long way in improving demand-supply dynamics in the bond market and aid the government in financing its fiscal deficit.

However, the degree of rise in bond prices on Tuesday – the price of the 10-year bond rose almost 50 paise – was driven to a large extent by technical factors dealers said.

Some traders rushed to square off earlier bets taken against bonds as prices found firm support because of an intraday decline in US Treasury yields. The resultant buying sent bond prices soaring, dealers said.

“Basically, the market positioning is such that there was a spurt of short-covering after an intraday dip in US Treasury yields which pushed up prices,” ICICI Securities Primary Dealerships head of trading Naveen Singh said.

“Given the hawkishness showed by the Fed and the strong likelihood of a hawkish RBI policy this week, the rise in prices can be attributed to the technical factors to a great degree,” he said.

Call rate closes at near three-year high 

The interbank call money rate on Tuesday closed at 5.20 per cent, its highest level since October 4, 2019, as liquidity in the banking system has shrunk considerably over the past few days.

The weighted average call rate (WACR) settled at 5.44 per cent, marking the fourth time since last week that the rate has closed above the prevailing repo rate of 5.40 per cent.

Prior to last week, the weighted average call rate had remained below the repo rate for three years. The WACR is the operating target of the RBI’s monetary policy. The shrinking liquidity puts pressure on banks to raise deposit rates in order to mobilise fresh funds and finance loan growth.

On September 20, the banking system liquidity slipped into a deficit for the first time since May 2019. The deficit on September 20 was around Rs 20,000 crore. At present, the system liquidity is estimated to be near-neutral.

The reduction in liquidity has been on account of huge dollar sales by the RBI in the foreign exchange market, a nine-year high momentum in bank credit off-take, advance tax payments and a slow pace of government spending, treasury officials said.

“Advance tax and GST related outflows have sapped liquidity from the system. Government cash balances are high. Government seems to be holding back on spending. FX outflows and festive season cash demand too are weighing on banking system liquidity,” IFA Global’s CEO Abhishek Goenka said.