Bond yield falls 25 bps on lower borrowing, rupee gains for 4th session against US dollar

Mumbai: Government bond yields fell 25 basis points, their steepest decline in 52 months, on Tuesday after the government announced lower-than-expected borrowing programme for the first half of the fiscal year 2019. Meanwhile, the rupee gained against the US dollar.

At 9.15am, yield on India’s benchmark 10-year government bonds was trading at 7.371%, down 25.20 basis points—its biggest decline since 25 November 2013—compared to its Monday’s close of 7.623%. Bond yields and prices move in opposite directions.

The rupee opened higher for the fourth consecutive session to 64.73 a dollar. At 9.15am, the home currency was trading at 64.79 a dollar, up 0.10% from its previous close of 64.87.

“Two critical deterrents we have been highlighting for quite sometime, too much issuance in the SLR Bond space and bulging up issuance in 10 years bucket, both of them mostly caused by precipitous rise in state development loans (SDL). The change in borrowing patterns has made an attempt to address one issue by lowering pressure on 10 years bucket, which is poster boy in the Indian Bond market,” said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. Ltd.

“Overall conducive for bond markets, although higher borrowings through long end likely to exert pressure on long end corporate bonds and SDLs curves,” Niyogi added.

On Monday, the government said that it will raise Rs2.88 trillion by selling bonds in the six months to 30 September, about 48% of its budgeted amount for the full fiscal year. This is the lowest first-half borrowing in the last 10 years in percentage terms.

For FY19, the total gross borrowings through government securities is budgeted at Rs6.05 trillion, higher than previous year’s revised estimated of Rs5.99 trillion.

Bond yields were under pressure and have surged over 100 basis points from the last six months due to concerns of rising crude oil prices, widening current account deficit, reduction in banking liquidity and the prospect of faster rate hike by the US Federal Reserve.

“We think that the RBI (Reserve Bank of India) is likely to be on an extended pause, even as we sparse through the risks to inflation that have consistently being highlighted by the RBI. The critical challenge will be for the government to meet its tax collection targets (mostly on GST revenues) for FY19BE to enable this reduction in the issuance size being sustained. Further, with likely narrowing of the BoP (balance of payment) surplus and also a sharp rise in the Currency in Circulation, there could be a chance for RBI to move into an OMO purchase mode in FY19,” said IDFC Research in a note to its investors.livemint

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