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The government’s borrowing program hit home this week with all its ferocity sending bond yields to three month highs. The benchmark 10 year bond yields soared 24 basis points in two days to cross 8.62%.
Post that we saw an unexpected ace from Reserve Bank of India (RBI), it decided to buy Rs 10,000 crore of bonds on the last trading day of the year and one of the bonds it bought was the benchmark 10 year. Yields fell but not by much.
Diwakar Gupta, managing director, SBI, Hitendra Dave managing director and head of global markets at HSBS, Srinivasan Varadarajan, ED, Axis Bank and A Prasanna, chief economist ICICI SEC PD discuss how soaring yields can impact corporate borrowing, stock markets and the economy.
They also shared views on how should one prepare for the massive government borrowing program in the coming six months and where they see yields heading.
Below is the edited transcript of the interview. Also watch the accompanying videos.
Q: What is your interpretation of the RBI action on the last trading day, what is it telling us?
Prasanna: I believe the proximate cause is that there has been a delay in government’s year end spending because the Budget session of the Parliament was delayed much later than usual this year. So, lot of spending has got kind of postponed into the next week. That is one reason why apparently RBI did this.
But, it also sends out a signal to the market that RBI was worried about the spiking yields and the noise on the street that yields will spike up further once the actual auction starts. So, RBI wanted to send out a signal that it is going to be present in the market, time and again if things do tend to go out of control.
Q: How would you interpret this? How does it change the market’s the attitude to bond yields? People were freely speaking about 9%, now will that be tougher?
Varadarajan: I would completely agree with what Prasanna said. It’s clearly telling the market I am going to be there, I am going to be a lot more active than what possibly you expect me to be. Their responses would be more in terms of trying to make sure that spike in yields is moderated and the borrowing program goes through in a non-disruptive manner.
So that’s the objective in terms of telling the market you didn’t expect to know more, but I am giving you one. So, be prepared for actions, which possibly I will do, which you don’t expect. Therefore make sure that rise in yields or the expectation in rising yields is moderated.
Q: Therefore you will not short the 10 year at 8.6% or 8.7%? What will be the physiological level that the market will fear to trend now that it has been caught short?
Varadarajan: The avalanche supply which is coming is clearly going to put an upward pressure on yields. It is more a question of how do you get there and at what pace do you get there. They can moderate the space to some extent; beyond a certain absolute level, there would be a lot more interventionist.
Q: Last week you were saying that even with the rate cut you think that 8.75% to 9% is the kind of normal range you are expecting for the 10 year, but with RBI unexpectedly early showing signs of extreme proactive on liquidity do you think now the markets gets more wary and therefore to some extent yield will not rise much?
Dave: I am sure that is one of the intents of doing what was clearly a surprise announcement last evening. That said you have to take into account the fact that we had cut off in the state loans coming somewhere around 9.25%-9.40%, which is SLR paper. So, there were certain developments which might have caused the Reserve Bank of India to undertake the OMOs that they have done.
But, despite that as you can see the impact has been fairly muted. You have to say that the paper which is going to be auctioned coming Tuesday is hardly a basis points or two basis points lower from what was generally considered to be very high level. Even the buyback paper is trading 5-6 basis points lower than where it was. I am not entirely sure whether this OMO is that significant a game changer.
If one reads into this that any Friday when yields are higher that what somebody perceives is comfortably high levels or comfortable levels you will continue to have a series of those. In the absence of that, the very factor in terms of supply being so huge demand only building up during the course of year, nothing fundamental changes.
I don’t think that at this juncture one can draw the conclusion that in Q1 we will have whatever Rs 30,000-Rs 40,000-Rs 50,000-Rs 60,000 crore of OMOs, which is the kind of size we actually require. If liquidity deficit is going to reduce it is quite difficult to read what can be the plausible reasons why they would undertake this.
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