Mumbai: North Block’s circumspect borrowing target for the second half of this fiscal failed to lift Indian bonds on Tuesday amid a palpable global threat of higher fuel prices, and signals from the central bank on baby steps to normalisation of liquidity potentially lifting overall rates marginally.
The central bank raised the cut-off for bids in the 7-day Variable Reverse Repo, seen as a tool to lift rates from abysmally low levels to normal, at 3.99%, closer to policy repo rate of 4%. Reverse repo rate is the rate of interest the RBI pays banks for keeping excess funds with it, and repo rate is the rate banks pay to borrow from the RBI. The cut-off was 3.6% on September 24 in the 14-day VRR.
Bond yields either rose marginally or fell only a tad instead of an anticipated sharp drop after the Reserve Bank of India (RBI) late Monday published the borrowing calendar that showed North Block may borrow less than what the markets pencilled in.
The benchmark bond yield was up two basis points to 6.23% Tuesday. The gauge was widely expected to fall by five basis points at least after the publication of the borrowing schedule. When bond yields rise prices fall.
“Local debt markets are tracking the recent rise in crude
prices and US treasury yields,” said Nagaraj Kulkarni, executive director and senior Asia rates strategist at Standard Chartered Bank, Singapore. “These are new headwinds to the local bond market, which otherwise has reacted positively. The RBI will remain vigilant and would not desire a rise in bond yields.”
Global crude oil prices crossed $80 a barrel for the first time in three years amid signs of widespread fuel shortfalls. Investment bank Goldman Sachs expects Brent to hit $90 a barrel by the year end.
Five-year bonds bearing a coupon of 5.63% yielded a tad lower at 5.67% Tuesday. These are the second most traded liquid government debt securities.
Yields were expected to drop 10 basis points in this category.
Other sets of sovereign papers maturing in 2035 yielded a tad higher. Those securities, ranked in the top five liquid list, were also expected to fall.
New Delhi will borrow Rs 5.03 lakh crore between October and March, in line with budget estimates.