Yield on 10-year benchmark government securities is likely to harden in the coming weeks after the Reserve Bank reduced the statutory liquidity ratio or SLR by 1 per cent last week, say experts.

Also, given the huge borrowing plan of government in August, there is less possibility of yields softening in near future.

“Yield on 10-year benchmark G-Sec will be in the current levels of around 8.20-8.25 per cent with less possibility of softening in the coming weeks,” Vijaya Bank Executive Director Shubhalakshmi Panse told PTI.

She also said current domestic economic environment and the forecast of a patchy monsoon would push the yield upward.

In the policy review last Tuesday, the RBI reduced the SLR (the portion of bank deposits held in treasury bills) to 23 per cent from 24 per cent, in its bid to increase liquidity to support credit growth. The move is expected to release Rs 64,000 crore in the system.

However, this is likely to push up the yields as banks have less incentive to invest in G-Sec.

“Bond yields will also depend on the supply of G-Secs. If there is higher supply, then yields will rally,” Panse said.

The government has an estimated borrowing plan of Rs 5.69 lakh crore this fiscal. Of this, over Rs 60,000 crore are likely to be borrowed in August.

“Bond yield will depend on the demand-supply situation.

Given the supply pipeline of G-Secs, the outlook is bearish,” said a public sector treasury official, seeking anonymity.

He also said that after the reduction, demand for government bonds is likely to be reduced, which would push up yields. “In the coming weeks, yield will be around 8.25 per cent on 10-year G-Sec,” he added.

Referring to liquidity pressure going ahead, the official said the central bank has opened many windows to maintain adequate liquidity, which will ensure there is no deficit situation.

(This article was published on August 5, 2012)
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