The spread between 10-year government securities and Reserve Bank of India's (RBI) repo rate narrowed to seven-year low in September to 26 basis points (Bps). This, experts attributed to the sharp fall in yield on government securities amid heavy inflows from foreign portfolio investors (FPI) in Indian bonds and rate hike pause by the RBI.
According to Bloomberg data, spread between 10-year government securities and repo rate stood at 26 bps on September 16. This was lowest level since August 2, 2017, when the spread stood at 21 bps.
One basis point is one hundredth of percentage point.
"Lower spread is a function of increased demand of government securities on various macro factors, lowering global bond yield and increased expectation of rate cuts," said Mataprasad Pandey, Vice President, Arete Capital Service.
In the last few months, yield on the government securities eased sharply due to various domestic as well as international factors. This includes inclusion of Indian bonds in JP Morgan Global Bond Index, easing domestic inflation, high consistent growth, and rate cut expectations in the advance economies leading to fall in US Treasury yields.
JP Morgan, on June 28, included Indian bonds in their bond index. Since the announcement of inclusion, Indian bonds have seen sharp inflows from foreign investors.
In the initial months after the announcement, inflows remained strong under Fully Accessible Route (FAR) by FPIs, but between February and May, flows remained volatile due to global and domestic uncertainties.
Currently, investment by FPIs in FAR securities stand at 2.4 lakh crore as on September 16.
On August 8, the RBI's Monetary Policy Committee (MPC) decided to keep the benchmark repo rate unchanged at 6.5 percent, for the ninth time in a row.
The MPC also kept the stance unchanged, staying focused on 'withdrawal of accommodation'.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
