The Hindu Business Line : Bond prices fall on Govt move to borrow more

As per the interim Budget, the Government is likely to borrow around Rs 3,60,000 crore next fiscal. Higher Government borrowing will put pressure on liquidity, as it means additional supply of Government securities. “We are looking at approximately Rs 30,000 crore of auctions every month, which is too high. Even if we assume that there is no credit offtake, how can the market absorb such high amounts? The RBI will have to take aggressive steps through buyback or open market operations to nullify the impact,” said a bond dealer with a public sector bank.

Higher Government borrowing could also indicate higher interest rates, which could in turn lead to a further slowdown in credit offtake by the private sector. If that happens, the Government and the Reserve Bank of India will have to resort to measures like cutting CRR, reverse repo and repo rates, in order to stimulate credit demand, he added.

According to Mr Joydeep Sen, V-P, Advisory Desk, BNP Paribas Fixed Income, while the overall liquidity is adequate, the sentiment for the bond market is marginally negative because of the additional borrowing.

Mr J. Moses Harding, Head, global markets group, IndusInd Bank Ltd, said moving the LAF corridor lower to 3.5-4.0 per cent may be in order, to meet the objective is to revive consumer demand and ensure flow of credit at affordable rates to “productive” and economic sensitive sectors.

However, a rate cut announcement would also pull yields down only for a short term, said Mr B. Prasanna, Managing Director and CEO, ICICI Securities Primary Dealership. In the long term, the market will be under constant pressure from the borrowing programme.

Mr N.S. Venkatesh, MD and CEO, IDBI Gilts, said the baton has been handed over to RBI by the Government to manage the economy in the interim by supportive monetary measures. Besides aggressive unwinding of MSS and OMO to ease liquidity, the RBI should also put a ceiling on repo and reverse placements, which would push banks to deploy funds for more productive purposes, he said.

Market movements

On Monday, the 8.24 per cent- 9-year -2018, which was the highly traded paper, opened at Rs 114 (6.21 per cent YTM) and closed at Rs 112.46 (6.42 per cent YTM), against Friday’s yield of 6.17 per cent YTM. During the day it touched a low of Rs 112.05 (6.47 per cent YTM). The 6.05 per cent 10-year 2019 paper opened at Rs 101.2 (5.98 per cent YTM) and closed at Rs 100.2 (6.02 per cent YTM). The total traded volumes on the order matching system were to the tune of Rs 7,030 crore.

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