Yields Trend Lower but No Directional Change As Yet…

The government borrowing program is completed to the extent of a little more than a third of the total primary issue planned for the year. While the average issue of securities continues to be around Rs.32,000 Crs per week, the liquidity in the system has come down drastically to Rs.1.50 lakh Crs. The overnight rate also has hardened further to 5 %. The 10-year benchmark yield is in the range of 7.25 % to 7.35%, and after touching a high of 7.60 % the yields declined to 7.15%. The rising interest rates and the consequent fall in growth has been seen as something that may deter central banks from going in for aggressive rate hikes in future. Since the menace of inflation is still a reality aggressive central bank action cannot be ruled out whether it is from the Fed or the RBI. Rate action is a forgone conclusion, but the quantum and pace of rate hikes could get smaller with apprehensions about growth gathering momentum. The SDLs at primary had hit a high of 7.80 % to 7.90 %, and this affords an attractive avenue for funds deployment with a three-to-five-year horizon, as it would entail significant gains on account of indexation too.

More than any other factor, what could bring pressure on the rates is the government borrowing programme. The massive program both of the central government and the state governments need to be manged either with higher liquidity or higher rates for the borrowing program to go through smoothly. Any measures like the bond buying programs of the yester years would create some room for the new issues. If due to a moderation in the inflation rate, the RBI stance on rate action also moderates in line with the inflation trajectory, that might also be positive for the perceptions or expectations about future price level. With a favourable and plenty monsoon, the prices of fruits and vegetables could start declining and this may also help. But oil prices are more or less stable at US$ 100-105 levels, and with a relatively weaker Rupee the challenges held out by high fuel prices are may haunt the markets for more time. Yet another favourable factor is the movements in the local market in sympathy with movements in US market. To a certain extent this may work, but the fundamentals of both the markets are different and therefore, these movements may get decoupled at some pint in time when local factors take precedence. After the corrective downward move, the yields may move back to the higher levels as the government borrowing program picks up pace, and as the banks encouraged by the rapid expansion of credit look for additional resources. A retest of 7.35% and 7.60% on the benchmark is highly likely.


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