Bond yields reverse trend after five days, but may remain soft

Ten-year government bond yield rises from 6.33% to 6.35%

After softening for five days, bond yields rose marginally on Wednesday following media reports that the Bimal Jalan Committee is likely to recommend transfer of RBI reserves in tranches to the government.

Jalan report

The yield of 10-year government bond ended at 6.35% as compared to the previous close of 6.33%. Yields went up by about 5 bps after news on the Jalan panel broke, but came down during the closing hours.

Bond yields fell for the last five days and are down by around 40 bps since the Budget announcement, after the government showed its resolve to maintain fiscal discipline.

Bond yields are at the levels seen immediately after demonetisation.

“There is an expectation that growth and inflation are likely to remain low. Data on IIP and inflation are coming weak. Global growth also remains on the weaker side,” said R. Sivakumar, head, fixed income, Axis Mutual Fund, explaining the reason behind the fall in government bond yields.

Rate cut hope

In addition, he said, the market was also hoping for further rate cut by the Reserve Bank of India (RBI).

“From a long-term government securities perspective, the aggregate rate cut is what matters more. The market is expecting, in aggregate, more rate cuts to happen,” Mr. Sivakumar said. The RBI reduced the key policy rates by 25 bps each in the last three monetary policy review meetings.

“The current growth-inflation mix has been favourable for counter-cyclical monetary stance. With inflation at sub-4% in foreseeable future, the MPC [monetary policy committee] will likely focus on tackling weaker growth dynamics as output gap appears to have widened. We see more easing in the offing, with cut beyond 25 bps in August being data-dependent,” said Madhavi Arora, Economist, Edelweiss Securities.

The central bank will announce the outcome of its next monetary policy review on August 7.