Gilts Yields Crash On Rate Cut Hopes

The Economic Survey brought life back to the government securities market today as the prices of government securities zoomed by Rs 1-1.50 at the long end of the market and yields crashed in reaction to the strong pitch made by the Survey for interest rate cuts. Yields on the benchmark 10-year paper yield dipped sharply from 7.51 per cent to 7.24 per cent.

A primary dealer told Business Standard: "It seems from the Economic Survey that the finance minister will cut the savings rate despite his party's defeat in the assembly polls. The market is expecting that it will lead to a immediate cut in the repo rate by the Reserve Bank of India which may even cut the bank rate in its April credit policy. This revived the sentiment in the government security market."

 

The fall in gilt yields today marked the end of a week-long run of rising yields. The sentiment in the gilt market was particularly subdued yesterday as the defeat of the ruling Bharatiya Janata Party (BJP) in the state assembly elections gave rise to apprehensions that the government may not be able to push reforms and cut the small savings rate in the forthcoming budget. This had triggered a hike in the yield of the benchmark 10-year paper from 7.39 per cent on Saturday to 7.51 per cent on Monday.

With today's fall, the 10-year paper yield has come down by more than three percentage points since the beginning of the financial year, and since January 1, it dipped by around 50 basis points.

According to money market dealers, the yield is slated to fall further on the back of expectations that finance minister Yashwant Sinha would announce a cut in administered rates in his fifth budget on February 28. The sentiment received a boost today as the Economic Survey says that the interest rates are still high and the small savings rates need to be reduced for moving towards a softer interest rate regime.

In the foreign exchange market, the rupee recovered by seven paise to close at 48.71/72. The fall in the government paper yields reduced the forward premium rate with the six-month annualised premium closing at 5.55 per cent today against yesterday's closing of 5.65 per cent. Forward premium rates moves in line with the interest rate differential in the Indian and US markets. The fall in the government paper yields today has reduced the gap.