With expectations of a rate cut by the Reserve Bank of India (RBI) gaining ground and the government getting ready to tap the overseas bond market, the yield on benchmark 10-year bonds on Tuesday plunged to a two and a half year low of 6.31 per cent before closing at 6.33 per cent.
The yield has fallen by around 100 basis points in the current financial year so far even as inflation remained benign and liquidity position improved. Market experts expect the yield to fall further and touch 6 per cent level if the RBI cuts the rates further in the coming months, provided the retail inflation remains below 4 per cent.
The RBI has already cut the Repo rate by 75 basis points this year so far. “Low 3.2 per cent June CPI inflation supports our call of the RBI panel cutting rates 25 bps on August 7 and 50 bps by March,” said a BofA Merrill Lynch Global Research report.
As the government is getting ready for borrowing in the overseas markets to meet its fund requirements, the domestic money market will be less crowded this year. With the Finance Minister actually showing further consolidation, the trigger for further monetary easing becomes even stronger.
“This alongside RBI’s move to positive liquidity (core system liquidity is already around Rs 80,000 crore positive and is likely to go towards Rs 200,000 crore by September post RBI dividend) and the global backdrop of sharply lower yields paints a continued bullish environment for quality interest rates,” said Suyash Chaudhary, head – fixed income, IDFC AMC.
Further, interest of foreign portfolio investors (FPI) in the debt market has revived with FPIs buying debt worth Rs 10,200 crore in July alone. FPIs had bought over Rs 8,300 crore debt in June.
According to Arvind Chari, head – fixed income & alternatives, Quantum Advisors, ideally, government bond yields will be range bound as the government, State and PSU bond supply remains large and markets might factor in higher borrowing as the months progress but with an accommodative RBI which may cut the Repo rate further in the months ahead and the prospect of an overseas dollar bond issue may lead to some further dip in market interest rates.
Care Ratings said rate cuts undertaken by the RBI and change in monetary policy stance to accommodative have aided the fall in corporate bond and commercial paper yields in the recent months. In addition, easing of the liquidity conditions in the banking system along with decline in government bond yields further supported the fall in yields in both the markets.
Corporate bonds tracked the decline in government bond yields in June. The average yield of benchmark 10 year bond yield in June at 6.93 per cent was 37 bps lower than that in the previous month, while the corporate bond yield at 8.28 per cent, was 21 bps than that in the preceding month. “We expect the benchmark bond yield to remain below 7 per cent this year, both on account of an unchanged borrowing number (Rs 7.1 trillion) and expectations of a sovereign India bond being introduced,” said Abheek Barua, chief economist, HDFC Bank.
The rupee on Tuesday fell by 17 paise to close at 68.71 against the US dollar amid foreign fund outflows. The rise of the US dollar against major currencies overseas also weighed on the rupee sentiment. However, sustained buying in the domestic equity market restricted the rupee’s fall, they added.
Meanwhile, oil prices turned lower on Tuesday, falling by about $1 a barrel as US President Donald Trump said progress has been made with Iran, signaling tensions could ease in the Mideast. Brent crude futures fell $1.01 a barrel to $65.47 by 1704 GMT. West Texas Intermediate crude futures fell by $1.11 a barrel to $58.47.