The bond market is factoring in a rate cut by the Reserve Bank of India (RBI) during Tuesday's monetary policy review. And, is also hoping for a dovish outlook.
If it happens, this would lead to a further fall in yields. Banks will then book profits on their treasury portfolio and companies, going slow with fund raising plans through bonds, will hit the market with issuances.
Data issued earlier this month for April showed Consumer Price Index-based inflation eased to 4.86 per cent, the lowest in four months.
The yield on the 10-year benchmark bond ended at 7.87 per cent on Wednesday, compared with the previous close of 7.89 per cent, while the new 10-year bond ended stable at 7.67 per cent. The new bond was auctioned last Friday.
“The new 10-year bond yield, trading below 7.7 per cent, indicates the market is partially pricing in a rate cut,” said R Sivakumar, head of fixed income at Axis Mutual Fund.
The yield on the 10-year benchmark bond had risen to 7.99 per cent on May 7.
The repo rate, at which banks borrow from the central bank, was kept unchanged at 7.5 per cent at RBI's earlier review, on April 7.
“Unless yields fall sharply, the treasury portfolio will not help banks by much. What might help will be a dovish guidance of RBI's monetary policy,” said the head of treasury of a large state-run bank.
According to the official, if RBI resorts to a rate cut of 25 basis points (bps) and the guidance is not dovish, the fall in yields will be limited to about five bps.
This month, bond issuances by companies have slowed; some had decided to postpone theirs.
These issuers might tap the market after a rate cut by RBI.
“Issuers are currently not comfortable with the bids they have been getting for their bond offerings."
As the monetary policy review is nearing and there is an expectation of a rate cut, most are waiting.
But, besides a rate cut, it is also a function of liquidity and foreign investors have not been buying aggressively in the recent past, due to a global bond selloff.
"Traders are looking for guidance of the monetary policy and liquidity improvement steps in the monetary policy,” said K P Jeewan, head of fixed income, Karvy Stock Broking.
Currently an AAA-rated company is able to raise two to three bond issues at coupon rates of 8.35-8.4 per cent.
