October 6, 2016 1:34:30 am
The yield on the 10-year benchmark bond on Wednesday fell 6 basis points to close at 6.67 per cent — marking a fall of over 10 bps in the last three sessions.
On Tuesday, the Reserve Bank of India (RBI) decided to cut the repurchase rate by 25 basis points to 6.25 per cent. Bond dealers snapped up paper as the possibility of another rate cut before the end of FY17 loomed large and lifted overall sentiment.
Traders believe the yield will fall further to 6.55 per cent-6.60 per cent before settling down since the market is now building up expectation for the next rate cut. Yields have been trending down since June this year — having fallen by approximately 80 basis points since June — and have fallen more than 20 bps since September 19.
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Ananth Narayan, regional head of financial markets for ASEAN & South Asia of Standard Chartered Bank, believes there is room for yields to come further down. “That’s our base case given the real rate is moving down and the hard 4 per cent is being replaced with the mandate of an inflation target of 4 per cent plus minus 2 per cent,” Narayan said.
“Bond yields are definitely headed down. We could see the 10-year testing 6.55 per cent-6.60 per cent levels post the US elections, which is the next stop,” said Jayesh Mehta, MD and country treasurer, Bank of America.
Wednesday’s session saw the yield moving in a tight range of 6.674 per cent-6.687 per cent for most of the day after having initially dropped from the 6.74 per cent-6.75 per cent open levels.
Ashish Parthasarthy, Treasurer at HDFC Bank, said this was a continuation of Tuesday’s sentiment. “The market definitely seems to think there is room for another rate cut this fiscal,” he said.
RBI executive director Michael Patra said, “With the risk free rate, i.e, the rate of interest on treasury bills at 6.5 per cent and inflation expectations, best exemplified in the RBI’s own projections, at 5 per cent, neutral rates are at 1.5 per cent. But we need to take into account the global situation, wherein the neutral rates are declining. So, it could be about 1.2 per cent or thereabouts.” FE
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