The market expects bond yields to soften by November, since the government seems to be sticking to its borrowing target in the current fiscal.
On Thursday, the Finance Ministry and the Reserve bank of India finalised its borrowing programme for the second half of the fiscal year beginning October 1. With 65 per cent of the Centre’s budgeted market borrowing programme of Rs 5.69 lakh crore, the government will borrow the remaining Rs 2 lakh crore by selling dated bonds through the RBI in the remaining period of the calendar year.
On Friday, the 10-year benchmark 8.15 per cent government bond maturing in 2022 close higher at Rs 99.98 from its previous close of Rs 99.90, while its yield softened to 8.14 per cent from 8.16 per cent on Thursday. “Going forward, we will see the yields further softening by November. Also, heavy supply of capital increases after October, so we would see some open market operations (OMOs) for more liquidity, said N. S. Venkatesh, Chief General Manager and Head of Treasury, IDBI Bank.
“Further, if inflation softens, we may see some easing of policy rates by the Reserve Bank. The 10-year benchmark bond yields could ease to 8.08 levels. Moreover, by March, we could see the yields softening to sub-8 levels post the policy,” Venkatesh added.
Shubhada Rao, Chief Economist, YES Bank, also expects the yields to decline to 7.50-7.75 per cent range by March.
Considering the deposits growth for banks at about 15-16 per cent, the banks would be able to have enough liquidity to absorb the current borrowings.
“The bond yields will stabilise. Also, there will be no pressure on the public sector banks as they have an excess SLR of about 3 to 3.5 per cent,” said K. Eswar, General Manager, Treasury, Central Bank of India.
Further, FII and FDI inflows into the emerging markets will support liquidity, though euro recovery will be delayed,” Eswar said.
As on September 14, the government had borrowed Rs 3.4 lakh crore this financial year, according to data from RBI. On September 21, the government raised Rs 15,000 crore, while Rs 15,000 crore of auctions would be held tomorrow.
Rao, however, anticipates fiscal slippage despite the government’s stance on the borrowing target. “We see a gap of about 40-50 bps in the fiscal target which is likely to stay at about 5.5 to 5.6 per cent. Hence, we would see excess borrowing post January,” she said.
The RBI is set to announce the second quarter review of monetary policy 2012-13 October 30.
“The best window for RBI for a rate cut would be from December to February as inflation concerns cannot be abated,” Rao added.