Yields on government securities likely to soften

The government securities market witnessed steady trading patterns for most of 2012. However, there were some exceptions when the market reacted with volatility to the news of high inflation and RBI’s monetary policy.

The Government of India issues securities (also known as G-Secs) at periodic intervals with varying coupon rates and maturity periods to meet its several financial needs and objectives.

Banks, financial institutions, insurance companies, mutual funds, and foreign institutional investors buy G-Secs as these instruments are relatively risk-free and backed by sovereign guarantee.

In 2012, the 8.15 per cent G-Sec (also known as the benchmark G-Sec because of its 10-year maturity period) maturing in 2022, and the 8.33 per cent G-Sec maturing in 2026 were the two most widely traded securities.

“The 8.15 per cent G-Sec saw average yields close to the coupon rate,” Vivek Mhatre, General Manager, Treasury, Union Bank of India, said.

In April, when the Reserve Bank of India cut the key policy rates by 50 basis points (bps), the yields on 8.15 per cent G-Sec softened sharply to 8.03 per cent. Subsequently, fiscal slippage and high inflation led to the spike in yields. The yields rose to a high of 8.26 per cent in August.

However, when the RBI eased the cash reserve ratio (the slice of deposits banks keep with RBI) in its mid-quarter review in September, the yields softened again. The CRR cut and softening inflation have kept the yields range bound since October.

What’s in store?

In 2013, the G-Sec yields are likely to soften.

The Government has already completed about 80 per cent of its borrowing programme. The Finance Minister has assured, on more instances than one, that the Government’s fiscal deficit will not cross 5.3 per cent of GDP.

Even if it does, the markets seem to have priced that in into their calculations.

“Since it is already known, the markets have largely priced it in. A little movement (hardening) will be there but that will be just short-term, for 2-3 days,” said Kumar Dasgupta, Executive Director, Risk Advisory Services, Pricewaterhousecoopers Pvt. Ltd.

Sources of funds

The Government will raise money from the disinvestment programme and this will have a positive effect on the G-Sec market.

Further, tax revenue for the Government is rising and the RBI has time and again assured of more open market operations or OMOs (RBI buys G-Secs from banks to infuse liquidity) in future.

Also, the RBI might cut policy rates by at least 25 basis points in January and another 25 bps in March. All of this augurs well for the government security market.

“Given the above set of developments, unless there is something drastic, we see the benchmark G-Sec breaching the 8 per cent mark and trading in the 7.75-7.80 per cent range by the end of the current fiscal...but in today’s dynamic market it has become difficult to predict beyond six months,” Mhatre added.

8.33%, 2026 bond

This security moved in tandem with the benchmark security.

“The average yield on this 14-year security was 8.28 per cent in the current fiscal. Yield on this security rose to 8.45 per cent in August,” Mhatre said.

The 8.33 G-Sec is likely to see good trading, he added.

Besides, the benchmark G-Sec and the 8.33 per cent G-Sec maturing in 2026, the 8.07 per cent G-Sec maturing in 2017 and 8.20 per cent G-Sec maturing in 2025 will see good trading in the next year.

> satyanarayan.iyer@thehindu.co.in

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