The Hindu Business Line : Bond yields soften as market factors in rate cut

The rate cut, they feel, will prevent banks from resorting to the easy way of parking surplus funds with the central bank and start lending. This in turn, they expect, will ease the liquidity pressure in the banking system.

The liquidity pressure in the banking system is underscored by the fact that banks on Wednesday borrowed Rs 10,990 crore from the RBI for two days under the repo window and call money market saw volumes of Rs 13,906 crore.

Call range

According to IDBI Gilts, money market rates on Wednesday were stable amidst a reasonably tight liquidity situation. The call range was noted at 7.10-7.50 per cent.

The bond market appears to be factoring in a rate cut, what with the yield on the benchmark 10-year government security (the 8.24 per cent 2018 security) thawing by 12 basis points over the last three trading sessions to close at a yield of 7.60 per cent .

In price terms, the 10-year paper has gained Rs 0.80 since the beginning of this week to close at Rs 104.24.

Reported comments from the Finance Ministry and the Economic Advisory Council hint at a scope for further easing of interest rates in the economy, IDBI Gilts said in its daily update.“Given the macroeconomic backdrop, whereby growth is slowing, inflation is trending lower, and the continued pressure on liquidity, I see the RBI cutting the reverse repo rate by 50 basis points to prop up growth,” said a senior Union Bank of India official.

“The G-sec market traded largely on a positive note on the back of reported comments from Petroleum Ministry hinting at the possibility of fuel price cut post-stabilisation of domestic currency and sustained softness in global crude prices. The yields eased considerably at closing amidst rising expectations regarding further easing of interest rates by RBI,” said Mr S. Srinivasa Raghavan, Head of Treasury, IDBI Gilts.

“The market, to some extent, is factoring in a rate cut. Bond yields have softened over the last few trading sessions ,” said Dr Golaka C. Nath, Senior Vice-President (Economic Research), CCIL.

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