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Yields bond with RBI decision, fall to lowest in three weeks

Benchmark bond yield dipped as low as 6.35 per cent on Tuesday from 6.48 on Monday.

ET Bureau|
Last Updated: Aug 28, 2019, 08.46 AM IST
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Mumbai: Bond yields tumbled to the lowest in about three weeks as the fear of government profligacy receded after the Reserve Bank of India (RBI) decided to transfer a record surplus to the government, including Rs 52,637 crore of excess capital.

While traders have been speculating over an expected fiscal stimulus using these proceeds, concerns about the government having to borrow more than it budgeted seem to have been assuaged, despite lower-than-forecast tax collections.

“It does support the bond outlook as borrowing worries get addressed a bit along with improved system liquidity,” said B Prasanna, head of global markets at ICICI Bank. “However, we need to see whether the government uses the additional bounty to stimulate the economy and, in that case, the fall in yields will be muted.” Using the money for a stimulus will mean that borrowing pressure remains, acting as a cushion for yields.

Yield Dips as Low as 6.35 per cent

The benchmark bond yield dipped as low as 6.35 per cent on Tuesday from 6.48 per cent on Monday. The plunge was sharper when compared with the 6.57 per cent close on Friday as some traders speculated about a possible RBI fund transfer to the government. The gauge closed at 6.53 per cent, five basis points higher than a day earlier on profit booking. Some traders, who bought sovereign securities at higher levels, sold at lower levels. Bond yields rise when prices fall. A basis point is 0.01 percentage point.

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Banks are seen buying relatively shorter-duration paper while insurers are looking to sell them and then buy longerduration debt, dealers said.

“Fiscal concerns are largely mitigated now,” said Ritesh Bhusari, assistant vice president, Federal Bank. “With the latest inflows from RBI, the government will be able to manage its fisc unless any unexpected deviation crops up. This should bring yields down from their recent highs. We see select opportunities to buy sovereign papers from here on.”

The benchmark gauge dipped as low as 6.33 per cent on July 16 in the wake of the budget proposing the sale of sovereign bonds overseas. It jumped to 6.63 per cent on August 14 amid speculation that the plan may have been scrapped. If the government borrows from offshore markets, it could reduce the supply of treasury securities back home, pulling yields down. However, the government has denied scrapping the plan.

The RBI’s central board accepted the Bimal Jalan committee recommendations on capital transfer on Monday, deciding to pay Rs 1.76 lakh crore for the year to the government, ending nearly a year of conflict between the regulator and its only shareholder on the quantum. That payout comprises Rs 1.23 lakh crore of surplus and Rs 52,637 crore of excess contingency provisions on the books of the central bank.

“The transfer of Rs 52,637 crore is a positive from the point of view of fiscal funding but it is looked on by market participants as a one-time transfer this year due to the contingency reserve buffer,” said Siddharth Chaudhary, senior fund manager, fixed income, Sundaram Mutual Fund.

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