Bond yields likely to climb more

Bond yields likely to climb more

India´s bond investors seem have gotten tired of the incessant supply of fixed income papers time when regulatory requirement them are reducing progressively.And, with inflation rising, chances of the Reserve Bank of India (RBI) cutting rates have almost nullified.

As a result, bond yields have been rising and this should beacause for concern for everyone as the 10 year bond yield is considered the benchmark interest rate of the economy.Bond yields and prices move in opposite direction.The 10 year bond yield rose to as high as 7.22 per cent in the morning trade, but climbed back to close at 7.19 per cent, marginally higher than its previous close of 7.18 percent

But if we expand the time frame, the bond yields have risen from 6.4 per cent level in August.That way, the rise in yields is quite dramatic even as the central bank cut its repo rate once in August.Oil prices have started climbing up and at near Rs 65 a barrel, it would put upward pressure on inflation and would widen the fiscal deficit even further, requiring the government to borrow more from the market.

This should have negative implications for bond yields.The yields should rise further after sharper than expected rise in inflation print for November to 4.88 per cent, against October´s 3.58 per cent.This makes any rate cut possibility closer to zero, even as rate hike could be distant.

The statutory liquidity ratio (SLR), or the mandatory share of deposits that banks have to invest in government bonds, is now at 19.5 per cent, which itself is lower than the earlier requirement of 24 per cent.However, in the lower limit too, there are sub limits of how much a bank can keep in its held to maturity (HTM) portfolio

In the HTM category, banks don´t need to value the investment at par with current market price, thereby avoiding nominal losses in the books.The balance portfolio of the bonds lay exposed to fluctuations in market prices and losses here are mounting.“There is a lack of demand.Banks have lost appetite,” said Prasanna Patankar, managing director of STCI Primary Dealer,a government bond auction underwriter.

The deluge of liquidity post demonetisation had to be neutralized through issuance of special bonds.The RBI has issued Rs 1 lakh crore of them, even as it continued to sell dated bonds cumulatively worth Rs 90,000 crore in the secondary market.More importantly, the market doesn´t have a firm view on the policy rate action.And this is what pushing up the yields further.

“When you don´t have a view on rates, yields will go up,” said Devendra Dash, head of assetliability mismatch at AU Small Finance Bank.Despite surprise on inflation front, dealers don´t expect yields to shoot up beyond 7.25 per cent. “A spread of 125 basis points above repo rate is good cap for bonds,” said Patankar.

According to Dash, there is an outside chance of the yields touching 7.4 per cent if oil prices continue to rise and touch Rs 70 a barrel. Otherwise, 7.25 per cent for the 10year would be an adequate level, he said.

RBI raises FPI investment limit in bonds

The Reserve Bank of India (RBI) on Tuesday revised upwards foreign portfolio investors´ (FPIs´) investment limit in bonds for the January-March quarter, according to its precommunicated road map of letting foreign investors hold 5 per cent in Indian bonds.

FPIs can now invest Rs 6,400 crore more in central government securities, and Rs 5,800 crore more in state bonds, over and above their existing limits.This move is part of a medium term road map that the RBI has planned for FPI investment.

From January, FPIs can invest Rs 2.56 lakh crore in central government securities, and Rs 45,100 crore in state development loans.The limits include those reserved for long term investors.For portfolio flows, the limits for central and state government bonds stand revised at Rs1.913 lakh crore and Rs 31,500 crore, respectively.

As of December 11, FPIs have exhausted 99.21 per cent of their investment limit in central government securities but have taken up only 17.11 per cent of their limits in state loans.

The Business Standard, New Delhi, 13th December 2017

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