The latest drop in bond yields have extended the past year's decline of over 130 bps.
A swift bond rally triggered by a fall in interest rates and a fiscally-responsible Budget has come to the rescue of beleaguered Indian banks, which are in the throes of a deleveraging cycle.
India's 10-year bond yield have fallen over 150 basis points from their highest point this year.
Bond yields and prices are inversely correlated as a fall in yields makes older bonds yielding higher interest rates more attractive.
So investors holding bonds in a falling-yield environment see a notional gain. For banks, this means that bad loans become smaller as a proportion in an overall book that has been repriced higher.
The fall in bond yields, combined with a generous Rs 70,000-crore cash infusion by the government, would help exacerbate pressure on Indian banks, which are battling their worst NPA crisis in two decades.
Every basis point fall in bond yields benefit banks by an overall $50 million, given the size of their portfolio, an Economic Times article quoting an estimate by ICRA said.
The bond rally has been further bolstered by India's proposal last month to issue its first overseas bond.
Further, the Reserve Bank of India’s (RBI) rate-cutting panel will again meet on August 7 to decide policy rates.
India is among few countries with an investment-grade rating to offer yields of more than 5 percent, Manu George, director of fixed income at Schroder Investment Management Ltd. in Singapore, told Mint. “Indian bonds offer good value in a low-yielding world and have the potential to rally further."
In a recent interview, Romesh Sobti, chief executive officer at IndusInd Bank, pointed out that even in 2002, around the time the NPA cycle peaked out, it was a fall in bond yields that had come to the rescue of banks.
Hence, this is not the first time that a strong bond rally helped in dealing with the bad debt hovering over India’s financial system.“While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher,” Sobti said in the interview. “Gains will be handsome enough to enable banks to start cleaning up the books faster."Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.