Mumbai: India’s benchmark gilt yield on 10-year papers crossed the psychologically important 6.50% mark on Tuesday, tracking the global trend of hardening yield. This is the first time since April 2020 that the benchmark crossed that mark, which signals that the interest rate in India may increase during the coming months.
Bond dealers said indications of hardening of rates were there since December 24 when 30% of the government’s total borrowing for the week, that was pegged at Rs 24,000 crore, devolved as investors wanted higher yield while the Reserve Bank of India (RBI) was not ready to accept the same. During the gilt auctions on December 31, the RBI cancelled auctions aggregating Rs 17,000 crore or about 71% of the Rs 24,000 crore that was planned. This, again, was due to the same reason.
“Over the last couple of weeks Indian fixed income yields witnessed some pressure, tracking global yield movement and rising crude prices,” said a debt fund manager.
According to the fund manager, rising supply of state government bonds since mid-December has further complicated the situation in the absence of any open market purchases or Operation Twist by the RBI, which was conducted regularly during the first half of the fiscal. On the contrary, the central bank is selling smaller amount of central government papers every week in the secondary market.
These factors, coupled with muted demand from the banking sector during the third quarter owing to sizeable credit pick up, has tilted the demand-supply balance towards the supply side. “As a consequence, even after the RBI’s yield signalling either through devolvement or partial cancellation of primary auction, proved to be less effective.”
In the government bond market, while the 10-year benchmark gilt yield surpassed the 6.50% mark for the first time after April 13, 2020, the yield on state development loans also crossed the 7.10% on Tuesday. Yields on central and state government bonds had peaked around the same time.
Bond dealers said indications of hardening of rates were there since December 24 when 30% of the government’s total borrowing for the week, that was pegged at Rs 24,000 crore, devolved as investors wanted higher yield while the Reserve Bank of India (RBI) was not ready to accept the same. During the gilt auctions on December 31, the RBI cancelled auctions aggregating Rs 17,000 crore or about 71% of the Rs 24,000 crore that was planned. This, again, was due to the same reason.
“Over the last couple of weeks Indian fixed income yields witnessed some pressure, tracking global yield movement and rising crude prices,” said a debt fund manager.
According to the fund manager, rising supply of state government bonds since mid-December has further complicated the situation in the absence of any open market purchases or Operation Twist by the RBI, which was conducted regularly during the first half of the fiscal. On the contrary, the central bank is selling smaller amount of central government papers every week in the secondary market.
These factors, coupled with muted demand from the banking sector during the third quarter owing to sizeable credit pick up, has tilted the demand-supply balance towards the supply side. “As a consequence, even after the RBI’s yield signalling either through devolvement or partial cancellation of primary auction, proved to be less effective.”
In the government bond market, while the 10-year benchmark gilt yield surpassed the 6.50% mark for the first time after April 13, 2020, the yield on state development loans also crossed the 7.10% on Tuesday. Yields on central and state government bonds had peaked around the same time.
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