Money Market View
The benchmark 6.10% bond maturing in 2031 is at Rs. 99.47 yielding 6.17%, against 99.49 rupees and 6.17% yesterday. Other bond yields were up by one basis point. The firming global oil prices and the uncertainty surrounding FOMC remain as
the key negatives for the bond prices.
Notwithstanding dismissal of Inflation as a transitory phenomenon by the Central bank- in line with the global tool kit- there is a very distinct probability that spiraling Inflation could trigger apprehensions about the expanding RBI balance sheet.
RBI might take fresh measures to anchor 10-year benchmark yield after it set the cut-off yield on the paper just shy of the 6.15% mark, which traders consequently see as the central bank`s tolerance limit for the 10-year yield.
The next major event for the bond market will be the RBI`s policy statement on Aug 6. Market participants will keenly watch out for the central bank`s guidance on inflation.
State Govt papers :
India`s state bond yields expected to fall for first time in six weeks as quantum on sale is lower. States selling Rs.70 billion of bonds maturing in 9-10 years today.
For the time being, state yields may not jump much above the 7% handle as there is a chance of RBI buying these papers in future GSAPs .
RBI normally avoids conducting bond purchase auctions in the same week as a monetary policy meeting but Markets are hopeful that they would conduct a special open-market operation this week, wherein it would buy on-the-run securities while selling short-term papers.
Short term yields :
Markets are seen favouring short-term bonds as spreads between those and the Treasury bills have risen sharply. After govt announced it would borrow Rs. 170 bln rupees in T-bills every week in Jul-Sep against Rs.360 bln rupees weekly in Apr-Jun, the cut-off yield at the auction of 182-day T-bill fell 16 bp to 3.56% between Jun 30 & Jul 20. In the corresponding span, yield on the 5-year benchmark fell only 7 bp to 5.64%.
CEA comments :
Chief Economic Adviser Krishnamurthy Subramanian said the government did not expect to borrow extra this financial year, and could potentially improve upon the targetted fiscal deficit of 6.8%.
Markets chose to ignore his comments as he had expressed similar views before and that the government`s gross borrowing of 12.06 trln rupees for the current fiscal year was likely to be reduced only marginally even if CEA `s estimates were correct.