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Bond yields are likely to recover to end the current financial year at around 7.90 per cent levels as bank treasury heads draw comfort from the fact that the Reserve Bank of India has not ruled out a rate cut.
Though the RBI, in its mid-quarter review of monetary policy, has underscored that there is limited room for a rate cut due to underlying inflationary pressures, bond market players read the statement to mean that there is some scope for a rate cut in the Annual Policy review on May 3.
According to Ashish Parthasarthy, Head of Treasury, HDFC Bank, “The yields are not likely to touch 8 per cent by March-end and the bond portfolio of banks will make profits as the yields will stay around 7.90 per cent levels.”
Bank treasury heads say the G-Sec yields may remain at current levels or recover to 7.80/82 per cent after the central bank injects additional liquidity through open market operations (OMO).
The yields on the 10-year benchmark 8.15 per cent government security, which matures in June 2022, closed higher at 7.92 per cent with the bond prices declining to Rs 101.44 (from previous close of Rs 101.58). The yield prices were the highest since February 5. Bond prices and yields are inversely co-related.
The RBI Tuesday cut the repo rate by 25 basis points to 7.50 per cent spur growth. However, it left the cash reserve ratio unchanged at 4 per cent.
‘Knee-jerk reaction’
N. S. Venkatesh, Head Treasury, IDBI Bank, believes the hike in yields was a knee-jerk reaction. “Though there is ‘limited headroom for further easing’, the RBI has not ruled out further cut, which may drive the yields lower,” he said.
Also, with wholesale price inflation going down, we can expect a rate cut in the next policy allowing the yields to go down further, he added.
However, Mohan Shenoi, President, Group Treasury, Kotak Mahindra Bank, said: “With not more than 25 basis points cut expected in the policy rates, the yields are bound to rise. Also, the market is expecting the bond prices to fall further due to excess supply of government securities in FY 2014. This will only increase the yields.”
Moreover, the RBI will issue longer term bonds as the Government will buy back the existing near-maturity level bonds. This is worrying the market participants and may further reduce the bond prices thereby hiking the yields, Shenoi added.
beena.parmar@thehindu.co.in
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