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Government borrowing may rise after RBI paused

The Overnight Interest Rate Swap (OIS) with one-year maturity, a derivative gauge where investors exchange fixed rates for floating, surged 24 basis points to 5.26%, suggesting that traders do not expect any rate reduction for now. The repo rate, or the rate at which banks access funds from the lender of last resort, remained at 5.15%.

, ET Bureau|
Dec 05, 2019, 08.50 PM IST
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Agencies
RBI
Traders are also apprehensive of a stagflation-like scenario, which points to higher consumer prices with low growth.
Mumbai: North Block may have to pay more to borrow from Mumbai’s financiers after Mint Road sprang a surprise Thursday, keeping the benchmark policy rate unchanged despite consensus expectations of further easing in benchmark rates.

The Overnight Interest Rate Swap (OIS) with one-year maturity, a derivative gauge where investors exchange fixed rates for floating, surged 24 basis points to 5.26%, suggesting that traders do not expect any rate reduction for now. The repo rate, or the rate at which banks access funds from the lender of last resort, remained at 5.15% after the policy review Thursday.

“I expect bond yields to move up as the RBI has reiterated the primacy of inflation in its framework,” said Shailendra Jhingan, MD & CEO, ICICI Securities Primary Dealership. “This will rule out rate cuts until we see a reduction in food prices. The risk of further supply in February - March on account of fiscal slippage could lead the 10 year G-Sec yields higher.”

Lower tax collections and a slowdown in the economy could lead North Block to borrow more, and miss its fiscal targets.

The benchmark bond yield shot up 15 basis points Thursday, the sharpest single-day jump in the past three months.

Bond yields rise when prices fall. The gauge closed at 6.61 Thursday versus 6.46 percent a day earlier.

The central bank also revised the retail inflation forecast upward.

“With almost a consensus on a rate cut, a pause is disappointing for markets,” said Gopal Tripathi, president and head, treasury, Jana Small Finance bank. “Yields are likely to harden due to higher funding cost and concerns of excess supply.”

Traders expect yields to climb up to 6.75-6.80 levels by February, when the first bi-monthly policy of the New Year falls due.

Traders are also apprehensive of a stagflation-like scenario, which points to higher consumer prices with low growth.

“Cutting rates without any credit pick-up does not serve any purpose,” said A. Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life Mutual Fund. “The debt market will gradually adjust to this fact. Sloshing liquidity will help negate any rise in funding costs.”

Earlier, in an ET poll conducted among 21 market participants, all respondents predicted at least a quarter percent cut in the benchmark rate, with some penciling in 35 or 50 bps reductions.

Separately, the banking system has surplus cash of more than Rs 3 lakh crore, which could help rates stay rather benign.

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