RBI Credit Policy: Where bond yields may go post rate cut
With the RBI indicating there maybe limited room for more rate cuts, experts say bond yields may stay within a tight range for the time being.
April 17, 2012 / 15:48 IST
Moneycontrol Bureau
Seconds after the 50 basis point rate cut was announced, the 10-year yield fell 11 basis points to 8.22%, but retraced gains and is currently trading around 8.33%.The apex bank’s first rate reduction in three years has bonds expecting to react positively to and yields to fall, which will benefit pricing for the national borrowing and debt.There is not a significant reduction in bond yields but a few analysts are pegging the 10-year number to hover around the 8.25-8.50 percent, because the RBI also hiked the limit on MSF (Marginal Standing Facility) which will provide some comfort to liquidity flows. But with the RBI indicating there maybe limited room for more rate cuts, experts say yields may stay within a tight range for the time being. "I would imagine 8.25-8.30 percent should be the floor as much as yields on 10-year is concerned," said Sameer Goel of Deutsche Bank. Since bond redemptions are due soon, Goel believes the liquidity situation in the country will improve, but not so much so that bonds yields fall below the repo rate.On the flip side, he believes the government's borrowing program could put some pressure in the bond market. "While 10-yields might not go back up to 9%, they may still find it very hard to move away too significantly from the 8.5 percent kind of levels," said Goel.The reduced expectations for rate cuts could put a floor on yields, especially given the hefty bond sales expected on the back of the government's higher-than-expected gross borrowing plans of Rs 5.69 lakh crore, compared to Rs 5.1 lakh crore raised in 2011-12.The government has pegged Rs 4.79 lakh crore of net borrowings from the debt market for the next fiscal. More than government bonds, however, Anant Narayan of Standard Chartered Bank believes corporate deposit rates will benefit. The yields could come into the corridor of repo and reverse repo rates because of the RBI's assurance to provide funds to banks at 9 percent. "Also, let us not forget that come May, the liquidity situation will improve as large bond redemptions come through," he added.Narayan expects the net shortfall of liquidity in the system to come down to about Rs 60,000 crore.While liquidity in the banking sector has eased, it remains acute, with some analysts questioning the extent to which banks can pass on these lower borrowing costs. It is a wait and watch game to see if lenders will pass on this cut as aggressively to the industry.The government has made it clear that growth should not slump below what level it is at now.Traders expected the 10-year yield to fall to 8.35-8.40 percent if the RBI cuts the policy rate, but warned a pause could sorely disappoint, leading yields to surge to 8.60-8.65 percent levels. Still, analysts warned the RBI was unlikely to be too aggressive in cutting interest rates in the remainder of the year, given doubts about whether inflation can continue to fall and worries about the government’s heavy borrowing plans.Chelsea Salandha
chelseasaldanha@network18online.comAnisha Mappat
anisha.mappat@network18online.com 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!
