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Yields Touch New Lows

As the government announces a reduced borrowing target for the rest of the fiscal year, bond markets rally with yields touching unprecedented lows.

It was an exciting week for bond markets as bond yields fell through the floor. The ten-year benchmark government security (GOI 2013, 7.27%) lost ten basis points to touch an all-time low of 5.16 per cent. Falling yields were accompanied by a surge in volumes. Average trading volumes at Rs 7055.68 crore were nearly 21 per cent greater than in the previous week.

The trigger for this fall in yields was a government announcement (after market hours on Monday) that it had lowered its borrowing target for the second half of the fiscal year. Against a borrowing target of Rs 60,000 crore the government would actually borrow Rs 25,000 crore through dated securities. This move would keep liquidity more than comfortable and was welcomed by bond markets. In early trading on Tuesday, the yield on the benchmark government security (GOI 2013, 7.27%) lost nearly ten basis points to reach 5.15 per cent, before closing at 5.16 per cent.

The lower borrowing requirement is primarily on account of state governments pre-paying loans taken from the Centre. As a result, the central government's fiscal deficit in the April to September period was at 28.3 per cent of the Budgeted Estimate as compared to 41 per cent of the estimate in the same period last year.

Liquidity in the system was thus robust and an average Rs 25,837.5 crore was received at the RBI's daily repo window. In the midst of these crashing yields, inflation inched up to Rs 4.35 per cent for the period ending September 13. In the previous period, inflation stood at 4.29 per cent and the rise was on account of a steep hike in fruit and vegetable prices.

In the currency markets, the rupee also reflected the enthusiasm of bond markets. The Indian currency gained 47 paise against the dollar. This was the sharpest fall of the dollar against the rupee in many weeks. The smooth redemption of the Resurgent India Bonds helped the rupee gain 27 paise on a single day (Wednesday). The rupee ended the week at 45.39/$ and has gained 5.3 per cent since the start of calendar 2003 and 4.2 per cent since the start of the financial year.

On the balance of payment front, the current account (for the quarter ending June 30) has come into deficit after seven quarters. This has primarily been on account of a surge in imports.

Outlook
If inflation continues above the 4.5 per cent level, there is a possibility that the bullish sentiment may weaken. All eyes are, however, trained on the RBI governor and the statements he issues in the run-up to the monetary policy later in October.