Macro Economy

Bond yields dip to 4-month low on liquidity, capital flows

Beena Parmar Mumbai | Updated on June 05, 2014 Published on June 05, 2014

With indications that the Government may be restrained in its borrowings to achieve the goal of fiscal consolidation, the yields are likely to thaw down the line

Buoyed by comfortable liquidity conditions in the banking system and foreign institutional investors pumping in money into the debt market, government bond yields touched a four-month low on Thursday.

The yield on the benchmark 8.83 per cent government bond maturing in November 2023, closed lower at 8.526 per cent (translating into a price of ₹101.79) against the previous close of 8.599 per cent (price: ₹101.54).

Bond yields and their prices are inversely related.

The last time the yield on the 10-year government security touched 8.52 per cent was in January.

Harihar Krishnamoorthy, Treasurer at FirstRand Bank India, said: “The yields started declining even before the policy, driven by heavy FII inflows into the debt market.”

FIIs invested ₹18,000 crore in the debt market in May.

Harihar pointed out that overseas investors did not have to hedge their investments and the yields have been better in the domestic market.

Govt borrowing

Further, with indications that the Government may be restrained in its borrowings to achieve the goal of fiscal consolidation, the yields are likely to thaw down the line. According to Harihar, the yields may stick around 8.50 per cent levels.

Bond yields also declined after the RBI on Tuesday signalled that further policy rate hikes are unlikely and that it could instead look at cutting rates if inflation reduces faster than expected.

RBI Governor Raghuram Rajan left the key policy rate, the repo rate (rate at which banks borrow from the RBI in case of shortfall of funds) unchanged at 8 per cent.

It also cut the statutory liquidity ratio (SLR) requirement for banks by half a percentage point to 22.5 per cent to inject more liquidity into the banking system. SLR is the portion of deposits banks need to invest in government bonds.

Though most big banks hold excess SLR investments than required, the move is likely to support long-term credit demand.

A bond dealer with a public sector bank, who did not want to be named, said, “Broadly, the yield (on the 10-year government security) will touch 8.25-8.30 per cent levels in a rate cut scenario. We can expect the yields to touch 8 per cent levels by November this year.”

Published on June 05, 2014
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