Government bond yields eased slightly across tenures on Thursday and are expected to fall further because the government said it would borrow only R2,00,000 crore during October-March period, as indicated in the Union Budget.
The 10-year benchmark bond yields ended the session at 8.16% and could ease to 8.10-8.12% on Friday as the absence of extra borrowing could trigger bond purchases. The government will borrow around R2,00,000 crore during October-March period and a total of R5,70,000 crore in 2012-13. Besides this, the government will also borrow R1,30,000 crore through treasury bills during the period.
On Friday, the Reserve Bank of India will conduct the last auction under the calendar for April-September wherein the government will borrow R15,000 crore. Most bond market players are positive that the recent measures announced by finance minister P Chidambaram and the rise in equity markets will augur well for the government?s fiscal position.
The economic affairs secretary Arvind Mayaram said the government is committed to fiscal consolidation and will be sticking to the Budget?s borrowing plan. The government and the Reserve Bank of India officials met on Thursday to finalise the borrowing calendar for October-March period. ?I think the 10-year bond could rally to 8.10% levels in the absence of extra borrowing,? said NS Venkatesh, head of treasury at IDBI Bank. ?A lot of traders are waiting to sell to make profits as the market is long on bonds right now. So even if there is a rally, it could be capped at 8.12% level for the 10-year,? said a bond trader at a private bank.
Venkatesh said the demand for government bonds to meet statutory liquidity ratio requirements would be enough to absorb the market borrowings. The banking system has currently invested around 30% of its deposits into government bonds even though the Reserve Bank of India mandates banks to invest only 23%.
Lacklustre credit growth and a surprise pick up in deposit growth has prompted banks to put more money into government bonds. As on September 7, banks? credit growth was 16.6% while deposits grew at 14.4%. ?Because of credit not picking up to a great extent, the borrowing will sail through smoothly,? said Venkatesh.
