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Stock Analysis, IPO, Mutual Funds, Bonds & More

Market worried over fiscal i math, repo-bond yield spread widens

The RBI purchased Rs 3,31,100 crore net of government bonds in 2018-19 through OMOs.

, ET Bureau|
Nov 14, 2019, 07.48 AM IST
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However, the print is unlikely to push up bond yields significantly, although likely pruning ratecut expectations.
Mumbai: The median spread between India’s benchmark government bond yield and the repurchase rate (repo) is now the widest in more than a year, suggesting that the cost of borrowing may not reduce drastically despite Mint Road’s persistent rate-easing.

The median differential is at 136 basis points in November this year, the highest since October 2018, an analysis by ETIG showed. The spread was at 142 basis points in October last year, and has ranged from 74 to 136 basis points in the past year. A basis point is 0.01 percentage point.

“Concerns of fiscal slippage have prevented yields from coming down,” said Sandeep Bagla, associate director at Trust Capital. “Large supplies of government paper — actual and potential — are keeping rates at the higher end of the range. This may create a problem in rate transmission.”
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The benchmark bond yielded 6.53 per cent Wednesday, three basis points lower than a day earlier. The repurchase, or repo, rate is at 5.15 per cent. The government's gross market borrowing for the current financial year is pegged at Rs 7.10 lakh crore, although New Delhi has not announced higher borrowings toward the second half of the year after it drastically cut corporate taxes.

Even if banks have started reducing interest rates, an elevated cost of borrowing could well stand in the way of achieving benign rates that could support growth. Companies borrowing through bonds would have to pay more if the spread remains wide.

“There is always a concern over fiscal slippage,” said Ashish Parthasarthy, treasurer at HDFC Bank. “The spread could remain elevated because there is a larger supply of central and state government bonds. Chances of open market operations (OMOs) are also less due to high liquidity.”

The Reserve Bank of India (RBI) conducts OMOs by buying or selling government bonds from the market, helping adjust cash availability in the system.

The RBI purchased Rs 3,31,100 crore net of government bonds in 2018-19 through OMOs. That means these papers exited the active market, creating space for participants to buy new bonds.

“We are looking at a fiscal deficit target of 3.8 per cent, and this also assumes that states run down their treasury bills investments to some extent to fund their portion of the corporate tax rate cut,” said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch. Surplus cash in the banking system is estimated at more than Rs 2 lakh crore.

India's retail inflation for the month of October breached the RBI’s medium-term target of 4 per cent for the first time since July last year due to higher food prices.

However, the print is unlikely to push up bond yields significantly, although likely pruning ratecut expectations.

“The quantum of future rate cuts would be debated now,” said Parthasarthy. “I do not expect yields going up as rate cut expectations still remain.”

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