Interest Rates Trend In Gilts Market Confusing

Primary dealers said there are confusing trends in interest rates in the government securities market, owing to the manner in which yields on government securities have started moving up even though there is no major change in the fundamentals of the economy.

"In the auction of 20-year paper on April 20, the Reserve Bank did not let the yields move up and devolved a major part of the issue on primary dealers. On the other extreme, in the case of 10 year paper auctioned just thirteen days later, RBI accepted the cut-off yield which was 26 basis points higher than the cut-off of the similar maturity," an official at PNB gilts pointed out.

 

The official felt that the RBI by giving a market related yield may want to create demand for the securities but the "market is confused about the direction in which the interest rates are heading. The situation should not be allowed to aggravate or else it could have a long term implication on government borrowing.

There is need to change the strategy of managing government borrowing so that there is no undue pressure on interest rate".

Another dealer said: "The yields on the government securities have started moving up without any proper justification or any major change in the economic fundamentals. Money supply continues to be comfortable with exports registering double digit growth. Tax collections have registered a growth of 19 per cent during 1999-2000. Rise in inflation appears to be the only cause for concern though this could be a temporary phenomenon as the monsoon could be good, leading to increase in agricultural production and fall in prices of primary articles

Dealers said the government securities market is at cross roads. "On the one hand, the monetary and credit policy 2000-2001 noted that while there has been a significant softening of interest rates in the past 13 months, the decline in nominal rates have not kept pace with the decline in real interest rates.

And on the other hand, the yields on government securities have started moving up even though all the macro economic indicators are strong," they said.