Bond yields down on lowered govt borrowing programme, interest rate cuts

Mumbai: The benchmark 10-year government bond yield fell for the fifth consecutive session on Tuesday, hitting a one-month low, after the government unexpectedly reduced its borrowing programme.

The 10-year bond yield was trading at 6.342%, down 6 basis points from its Monday’s close. Since the 8 November invalidation of high-value currency notes, the yield has dropped by 45 basis points.

Late on Monday, the government lowered its borrowing target for the financial year saying it will sell bonds worth Rs66,000 crore via six equal weekly auctions—down from the Rs84,000 crore planned earlier—the Reserve Bank of India said in a statement.

“The cut down in the borrowing programme by the government is good news for the bond markets. It is also an indication that the government might have got higher taxes due to demonetisation,” an analyst with a domestic brokerage said on condition of annonimity.

Separately, weak macro economic data such as the fall in purchasing managers’s index and moderation in the eight core sector output also increased the hopes of rate cuts by the Reserve Bank of India.

The Nikkei India manufacturing purchasing managers’s index fell to 49.6 for the December month against 52.3 in November, indicating contraction. The growth rate of eight infrastructure sectors—coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity—was 4.9% in November, down from 6.6% a month earlier.

A third reason for moderating bond yields is the steep rate cuts by many private and state-run banks after a massive inflow of deposits spurred by the demonetisation of high-value banknotes led to a significant reduction in the cost of funds.

“The recent (rate) cut by most of the banks (is) also helping the sovereign paper,” said Soumyajit Niyogi, associate director at India Ratings and Research.

Since the government on 8 November banned Rs500 and Rs1,000 currency notes, banks have received a flood of deposits—Rs12.44 trillion of deposits in old notes by 10 December, according to the last figure released by the Reserve Bank of India.

“Although the government has increased daily withdrawal limit the weekly limit is unchanged and this is the indication that the government is not going to change the rules in one go and the money which was received from public will stay in the system for some time more,” said Niyogi.