Bond market looks to RBI for a fillip

All eyes in the bond market are fixed on the Reserve Bank of India (RBI) as traders say an interest rate cut is the only way through  which market sentiment will receive a fillip.

Bond traders are particularly disappointed with the higher-than-expected cut-off at the open market operations on Thursday.

The RBI bought back Rs 3,000 crore of the 8.24% 2018 bond and  Rs 2,000 crore of the 7.94% 2021, but  rejected all bids at the 7.40% 2035  tender.

The cut-off yield was also set at 6.25% for the 2018 paper and 6.73% for the 2021 paper, higher than market expectations of 6.17% and 6.55%, respectively.

Dealers expect the mood to remain subdued unless there  is some clear direction from the RBI this week.

Siddharth Shah, vice-president at STCI Primary Dealer Ltd, a wholly-owned subsidiary of Securities Trading Corporation of India (STCI), said markets were expecting a better cut-off.

“The rejection of 7.40% 2035  was may be because the price markets quote was higher than the RBI’s expectations. There was no fresh buying after the auction,”
he said.

Shah expects the mood in the bond market to remain subdued, with yields likely to continue treading higher, pulled by excessive government borrowing before the end of the fiscal.

The government has announced that it will raise Rs 46,000 crore between now and the end of March. Dealers expect the most-active 8.24% 2018 bond to inch towards 6.5% this week after ending Thursday at 6.32%.

The market opens after a four-day break on Tuesday, after Friday’s strike by RBI officials demanding that they get pensions similar to central and state government
employees.

On Monday, markets are shut for the Mahashivaratri festival.

RVS Sridhar, head of markets at Axis Bank, says expectations of rate cuts have increased after governor D Subbarao’s comments in a conference in Tokyo that there is more room for slashing benchmark interest rates.

Dealers are expecting at least a 50 basis point (bps) cut in the repo and reverse repo rates this week. However, there are some who argue that even a rate cut won’t help the government bond market to recover much.

Suresh Prabhu, senior vice-president at HDFC Bank, says the additional government borrowing is unexpected and just too steep for the bond market to digest.

“Even though inflation is lower, the government bond market has become inelastic due to oversupply. Even the RBI can’t prevent bond yields from rising because besides these auctions, there will be also a new supply coming from April,”  he said.

Dealers also point out that bond yields have actually risen after RBI’s last rate cuts at the start of January. For example, the most active 8.24% 2018 bond yield has risen from 5.20% to 6.32% since then.

Corporate bonds
Surprisingly, the bearish sentiment in the government bond market has not spread to the other  markets. The corporate bond market for instance has seen very little action in the last week and dealers are not upbeat.

S Raghavan, head of treasury at IDBI Gilts, says companies are staying away from the market fearing that their bonds may not be subscribed because of the high rates.
“The 10-year rate for corporate bonds is above 9%. Bank rates have also not come off. For large guys like Reliance, it is at 9% but mid corporate guys still have to pay 14%,” he said.

Raghavan expects a harsher action from the RBI, like cutting the repo, reverse repo and also cash reserve ratio by 100 bps each.

“The rate cuts are likely this week as Saturday is the start of a new reporting week, though they may make the CRR effective only from March 15,” he said.

A CRR cut, he argues, will help all by infusing liquidity and forcing the banks to cut rates further, which will reduce corporate borrowing costs and also pull the corporate bond yields lower.

“But even with a 100 basis point cut, I don’t expect corporate bond yields to fall more than 30-40 basis points because there are many companies waiting to issue paper at the end of the financial year. So this supply will prevent yields from falling further,” he said.