Moody's India rating upgrade: Bond market rallies, then fades

The bond markets rose on news of the sovereign rating upgrade for India in the morning but the cheer didn't last, due to concerns over the fiscal deficit and inflation trajectory, pushing yields above seven per cent again. The yield on the government benchmark (10-year) eased sharply (about 10 basis points) to fall below seven per cent in the morning hours but closed at 7.05 per cent, against Thursday's close of 7.06 per cent.

Bank treasury executives said initial optimism at the rating upgrade from rating agency Moody’s led the yields to open about 10 basis points lower than Thursday's close. However, gilts failed to retain the gains, with traders booking profit.

Finance Minister Arun Jaitley’s recent comments on a probable revision of the glide path for fiscal deficit consolidation has weighed on the markets, ICICI Bank said. Also weighing on bond market sentiment are global factors such as the prospects of the US Federal reserve raising its rate and shrinking its balance sheet, beside crude oil prices staying above $60 a barrel.

The RBI’s approach on liquidity also has a strong bearing on the yield trend, said the head of treasury with a foreign bank.

HDFC Bank said there could be more episodes of short-term decline in the yield. Some support is also likely to come from the Moody’s upgrade but the extent of this is unclear.

The yield on the benchmark 10-year is expected to be in the band of 6.8-6.9 per cent by the end of FY18. This is assuming that oil prices stabilise below $65 a barrel, goods and services tax collection improves in the coming months and the government adheres to its fiscal deficit target for the year, added the Bank.

Meanwhile, the RBI said it had withdrawn the sale of Rs 10,000 crore worth of G-secs under open market operations (OMO). It said the OMO scheduled for November 23 had been withdrawn in view of the recent market development.