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Euphoria Mellows Down

Uncomfortable with the yields touching the 9 percent psychological barrier, Reserve Bank of India stepped to arrest the free fall in the sovereign yields which eventually inched up from their historic lows.

The five-month old rally in sovereign bonds lost steam, with the 10-year benchmark yields touched a new low of 9.06%. However, Reserve Bank's aggressive open market operations mopping Rs 10,200 crore pushed the 10-year benchmark yield to settled at 9.12%. The corporate bond yields gained with the sovereign yield curve after dipping to its historic low of 8.99 percent during the week. The steady call rates coupled with repo subscriptions of Rs 58,025 crore reflects ample liquidity in the market. Another Rs. 1800 crore was infused in to the system on account of coupon and redemption inflows. The otherwise strong rupee bowed down to month-end greenback demand from banks and closed at Rs 43.13.

The Reserve Bank's annual report maintained a 6-6.5 percent growth estimate for the current fiscal, but with riders -- turnaround in industrial output and a good monsoon. RBI also renewed its bias to softer interest rate regime ahead, with its intent to cut CRR cuts as and when needed. RBI also laid stringent supervision norms for urban co-operative banks and financial institutions.

The government completed 66% of its targeted borrowing for the year. A batch of staff salary payments in the coming week might necessitate fresh market borrowings. On the other hand, as per the latest fiscal data for the four months reached 50 percent of the target for the full year as against 32 percent in the corresponding period, previous year. And the finance minister's statement that government will not be constrained by fiscal deficit to revive the sagging economy leaves apprehension about government's spending within limits.

Reserve Bank of India is likely to continue selling bonds through open market operations. The declining yield will lower returns for banks. This being fully discounted, the market is likely to gain stability at these levels in view of the low rate. In the very short-term, market can get a boost with available liquidity of Rs. 1800 crore from redemption and coupon inflows. There could be realignment of returns and market sentiment can change once the government announces its fresh borrowing plans.