Finance minister P Chidambaram on Tuesday said the recent rise in the yield on government securities (G-secs) was temporary and the rates could moderate with the help of “some measures the RBI (Reserve Bank of India) will take”.
Speaking to reporters at a press meet following the launch of the Bharatiya Mahila Bank, the minister indicated that if food inflation moderates in November (he hoped it would), a conducive RBI policy could be enabled.
Headline inflation had risen to an eight-month high of 7% in October, even as food inflation eased a bit to 18.19%.
This, coupled with consumer price inflation of above 10% in October has led to fears of a further rate hike by the central bank, which have also driven bond yields.
The yield on the 10-year 7.16% bonds due 2023 remained close to 9%, ending at 9.01% on Tuesday. Yield on the benchmark bond had hit a multi-month high of 9.15% last week due to tight liquidity conditions and a G-secs supply overhang.
Since then, yields cooled off a bit after the RBI bought more than Rs 6,000 crore worth of bonds through open market operations (OMOs).
"Given the response to the RBI's OMO and the fact that the absorptive capacity of the market is low with the supply being what it is, bond yields are unlikely to ease from current level," said Hitendra Dave, head of global markets at HSBC.
Bond prices and yields are inversely correlated with a fall in bond prices implying a rise in yields.
Many analysts, however, did not share the finance minister's optimism. “There is unlikely to be any significant positivity for the bond yields in the near future with the inflation numbers still failing to come off in a significant way,” Kotak Mahindra Bank chief economist Indranil Pan said in a note. The bank expects the RBI to hike the repo rate by 25 basis to 8% at its mid-quarter review in December.
The relatively high level of yields on benchmark bonds like the 10-year government bond has pushed up the cost of borrowing for the government and has also led to an increase in corporate borrowing costs in the market.
So far in 2013-14, the rise in bond yields has rendered the cost of borrowing 10-year money for the government dearer by a whopping 100 basis points.
The government borrowed Rs 3.49 lakh crore through bonds during April-September and is slated to borrow