Financial Daily from THE HINDU group of publications
Sunday, Mar 03, 2002
Financial Daily from THE HINDU group of publications Sunday, Mar 03, 2002 |
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Investment World
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Debt Market Bias for soft rates continues
THE bond market did not seem very enthused by the Budget. The benchmark 10-year bond yields rose about one-hundredth of a basis point (bps) to 7.30 per cent. The yield curve, thus, remained at the pre-budget levels. The lack of positive reaction may well be an instantaneous reaction to the Finance Minister not cutting the small-savings rate as expected; the market was expecting a rate cut of 100 bps whereas the Budget has cut rates by 50 bps. The Budget also states that the Reserve Bank of India (RBI) will issue a calendar for government auctions. This may help primary dealers (PDs) and banks manage their trading books and cash positions better. At present, the RBI announces a bond auction a few days in advance. Banks and PDs that do not have enough money borrow in the call market to bid at the auction. The demand for overnight money sometimes pushes up the call rate, tightening the spreads for the players who engage in such carry trade. Viewed in this light, the issuance of the auction calendar may mitigate spikes in call rates on the run-up to the auction. Besides, the issue calendar may help these players develop a when-issued market as and when the shorting of government securities is permitted. A when-issued market is one where bonds will be traded even before the RBI auctions them. Such a market could help in better alignment of the primary yields with the secondary yields. It must be mentioned here that the provision for short selling of bonds is unlikely to be allowed for now. The replacement of the Public Debt Act by the new Government Securities Bill is primarily to allow electronic trading in government bonds. On the whole, the Budget may not have explicitly provided incentives for the debt market, but the cut in small-savings rate by 50 bps clearly points to a continued bias for soft interest rates.
B. Venkatesh
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