The Hindu Business Line : Govt borrowing may cost more

THE RBI has been proactive in dealing with inflationary expectations, by increasing the reverse repo rate right away. Many market participants were expecting such a rate hike, but not in this Credit Policy. The uncertainty, at least as of now, is over and traders in fixed income securities and money market products can operate with some sense of ease and clarity.

Nonetheless, the yields in the bond market have shot up following the hike in the reverse repo rate. The 10-year benchmark yield went up to 7.23 per cent soon after the policy announcement from 7.12 per cent during the previous close. As a result, bank treasuries and others holding government securities have to accept a further deterioration in the value of their G-secs and bond portfolios. This would also mean that cost of government borrowing would inch up further and is not likely to end at this level, as the yields are expected to harden further on the back of expected inflationary pressures fuelled by the impact of high international oil prices. The 10-year benchmark yield is, therefore, expected to cross 7.5 per cent in the near term. This also will be in tune with the hardening of global interest rates, with US Fed rates expected to reach around 4.5 per cent over the year, though in a measured way.

The RBI, however, has taken care of the growth aspect, inasmuch as the other key rates such as the Bank Rate and CRR have been left untouched. For bond market dealers, the policy document does make a reference about the introduction of `when issued market', `limited short selling' in government securities, `optionalities in OTC rupee derivatives', and so on. But the key issue is that of expediting these provisions. The market participants have been waiting for these products to manage their risks more effectively in a rising interest rate scenario.

On the expected discussions on primary dealers' (PDs') problems and their increased responsibilities in the post-April 2006 era, the policy document has addressed it by making a reference on expanding the permitted structure of the PD business to include banks, through a consultative process subject to the necessary safeguards.

(The author is Managing Director, Securities Trading Corporation of India Ltd.)

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