Guessing game on over stabilisation bond impact

OUTLOOK/G-SECs

March has traditionally been a crucial month for bond market dealers. In the past, while the central bank has pushed up bond yields through open market operations to tame an exuberant market, this time open market operations will be substituted by the market stabilisation bond "" a move that could push up yields.

Dealers feel that inflation has already done its bit and yields have gone up since the last few months. The ten-year benchmark yield, which was ruling at around 4.95-5 per cent, is currently ranging between 5.25-27 per cent.

With the central bank giving no indication on the manner it proposes to issue market stabilisation bonds, there is widespread speculation on its impact.

While JP Morgan is optimistic that there will not be a spate of sales, ICICI Securities is maintaining a neutral to negative stand on taking exposure in bonds.

Last week, the central bank said that it had reached an understanding with the government on the issue of market stabilisation bonds.

As per the terms of the agreement the government would issue up to Rs 60,000 crore bonds in a year. These bonds would be on-sold by the central bank from time-to-time to absorb liquidity from the markets.

The interest cost on these bonds will be borne by the government through the consolidated fund of India . The net cost of the bond issuance will be thus be limited to the coupon payment on these bonds. ICICI Securities is of the view that while the bonds issuance may lead to a rise in yields, the central bank shouldn't refrain from it.

In its latest debt market report, it has added that if the central bank goes ahead with the market stabilisation bond issuances in early March without bothering too much about the impact on bonds, yields would move up further by 10 to 20 basis points across the yield curve to its year-end forecast of 4-4.5%.

Dealers feel that large-scale liquidity withdrawal could hurt the prospects for private credit growth at a time when the Reserve Bank of India is persuading banks to support economic revival by lowering lending rates for non-prime borrowers.

Besides, with only six weeks for the start of the government's borrowing programme for the next fiscal the central bank would not risk pushing up the cost of government.