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Government Securities’ (G-Sec) prices rallied on Thursday despite inflationary concerns from rising prices of petrol and diesel as the Reserve Bank of India Governor Shaktikanta Das observed that the inflation spike appears to be transitory.
The price of the widely traded 2035 G-Sec/GS (coupon rate: 6.64 per cent) rose 51 paise to close at ₹99.21 (previous close: ₹98.70) with its yield declining about 6 basis points to 6.73 per cent (6.79 per cent).
Bond prices and yields are inversely related and move in opposite directions. The price of the 5.63 per cent GS 2026 increased by 40 paise to close at ₹99.70 (₹99.30) with its yield declining about 10 basis points to 5.70 per cent (5.80 per cent).
Das, in an interview to a financial daily, said the current inflation spike appears to be transitory, driven largely by supply-side factors, and it is expected to moderate in the third quarter.
Financial stability report
The central bank’s latest financial stability report has cautioned that hasty withdrawal of policy stimulus to support growth before sufficient coverage of the vaccination drive can sap macro-financial resilience and have adverse unintended consequences. CARE Ratings Chief Economist Madan Sabnavis emphasised that the rising prices of petrol and fuel has spooked the market, which sees inflation climbing. This in turn has affected the bond market as the RBI has held on to the yield curve.
‘Bond market edgy’
“It (rising fuel price) enters transport costs which get embedded in the final prices of all commodities. The fact that fuel is not in the GST (goods and service tax) gives freedom to the government to increase taxes without any constraint.
“But allowing prices to increase has distorted inflation which in turn has kept the bond market edgy,” he said.
Sabnavis opined that the RBI’s resolve to manage the yield curve has caused a disconnection between monetary policy action and interest rate action.
Meanwhile, the first tranche of G-sec Acquisition Programme (G-SAP 2.0), entailing open market purchase of five G-Secs aggregating ₹20,000 crore, sailed through.
This sets the stage for banks and primary dealers to bid at Friday’s auction of three G-Secs, including a new 10-year GS.
The Government will be raising ₹26,000 crore via sale of these G-Secs. It will also have the option to retain additional subscription up to ₹6,000 crore against the securities being auctioned.
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