Mumbai: North Block’s decision to borrow an additional Rs 1.1 lakh crore to compensate states for the shortfall in tax revenue has put the spotlight on Mint Road. The government’s merchant banker will need to come up with measures, the street believes, to help allay concerns of hardening yields as debt supplies mount.
After the announcement, the benchmark bond yield Friday rose four basis points, pulling prices down. Yields on a five-year paper series jumped 11 basis points Friday to 5.27% and hardened 3 basis points to 5.93% for 10-year paper.
“Bond traders are concerned about the additional supply of paper, which is reflected in the rising yields,” said Vijay Sharma, executive vice president, PNB Gilt. “Any creation of additional demand (for papers) would help allay the fears. Either secondary market bond buyings or any open market purchases should normalise the yield curve.”
The Reserve Bank of India (RBI) has bought a record Rs 13,445 crore worth of bonds in secondary-market deals, actioning its version of quantitative easing to help allay concerns over additional sovereign borrowings. Between September 28 and October 1, the central bank bought these papers on four consecutive days, ET reported Monday.
It extended its buying spree by a net of Rs 6,790 crore between October 5 and 11, show the latest RBI data.
“Traders were apprehensive about Friday’s bond auction, which went well prompting people to believe that RBI will keep yields under check,” said Naveen Singh, executive vice president at ICICI Securities Primary Dealership.
RBI is suspected to have intervened Friday buying some shorter duration papers. The share ‘others’, a category that matters when RBI buys bonds on screen, showed a net buying of 4.6 percent of total gsec volumes reported, show data from Clearing Corporation of India. Besides, public sector banks were net buyers with private sector banks turning net sellers.
The central bank sold Rs 20,000 crore worth of bonds via weekly auction Friday. Many thought that it would have devolved on bond houses seeking higher rates.
“You may see rising secondary market bond purchases by active interventions,” said Ajay Manglunia, managing director at JM Financial.