Bond yields plunge to 3 year low

MUMBAI: Bond yields plunged to a three-year low as one-and-a-half years of interest rate cuts by RBI Governor Raghuram Rajan and his liquidity easing measures begin to bear fruit. If inflation remains under control, stars are aligned for a sharp reduction in rates amid global central banks’ likely opening of the liquidity spigot yet again to stave off the ill effects of Brexit.

An across-the-board fall in borrowing costs led by the Government could lead to the much awaited consumption boost when it gets added to the surge in incomes due to the implementation of Pay Commission recommendations.

The 10-year bond yield closed at 7.39% Tuesday as compared to 7.43% a day earlier. The latest level was last seen on June 20, 2013.

“Monetary transmission is beginning in right earnest,’’ said Srinivas Varadarajan, head of fixed income and currencies (India) at Deutsche Bank. “I see borrowing costs come down in the backdrop of the improved liquidity conditions. The move to liquidity neutrality for the banking system, with a few periods of surplus liquidity, should over time, impact MCLR positively.’’

Monetary policy works with a lag and the RBI’s 150 bps rate cut since January 2015 is beginning to show in market borrowing costs. The fall in borrowing costs along with an improvement in liquidity should silence the impatient critics who were blaming the regulator for not bringing the rates down quicker. “A combination of factors have triggered fall in the bond yields in the past two weeks,” said Soumyajit Niyogi of India Ratings & Research. “While easing liquidity has contributed the most along with a good monsoon, globally yields are heading lower after Brexit.”