Higher RBI dividend, lower auction augur well for the bond market

MUMBAI: What if RBI governor Raghuram Rajan has not yielded to calls of an interest rate cut! With his largesse to the government by transferring about Rs 53,000 crore surplus to the government, up two-thirds from the previous year, he could at least ensure that the rates do not rise.

The ten-year new benchmark bond yields on Monday fell about five basis points to 8.60% prompting some amount of bullishness.

“The higher dividend is a positive for the bond market,” said Badrish Kolhalli, fund manager fixed income, HDFC Life Insurance. “It suggests reduced borrowing requirements by the government in the near term. The final

impact will be seen towards the end of the year.” The Reserve Bank of India has already reduced its planned weekly government bond sales by threefourths. Last Friday, RBI had said that instead of the planned Rs 14,000-crore auction of such securities, it would offer papers of three maturities worth Rs 8,000 crore on August 14. RBI was estimated to pay Rs 46,000 crore of dividend to the government.

The cut in auction amount is supportive to the rising bond yields.

The benchmark 10-year gilt yield surged as high as 8.68% last week from a low of 8.37%, the level seen two weeks ago.

“Traders were negatively surprised at the governor’s hawkish tone in the August 5 RBI policy. They earlier concluded that rate cuts would come soon without any possibility of a rate hike,” said a bond dealer from a primary dealership.

Rajan said that policy action was a two-sided thing. If inflation comes down, it makes room for cutting rates, while any higher inflation along with external shocks still make a case for a rate hike.

The Reserve Bank did not sell about Rs 3,445 crore, or one-third of the benchmark paper, scheduled in an auction held on August 1. The central bank now uses the multiple price method where investors bid below the cut-off level and they are allotted at their respective bids. Earlier, RBI used to conduct auction through an uniform price method where everybody were allotted at the cut-off level only.

“Transfer of government funds is equivalent to 0.07% saving of the fiscal deficit estimates,” said Soumya Ghosh, chief economist at State Bank of India. “Liquidity too is expected to improve due to this.” In its first Union Budget for 201415, the new government retained the fiscal deficit target at 4.1% for the financial year as estimated by the previous government in the interim budget. However, bond traders had expected higher than this.

In 2013-14, it was at 4.5% of GDP.

A lower fiscal deficit or excess of expenditure over revenues should bring down government’s borrowings. Gross market borrowing for the current fiscal is pegged at Rs 5.97 lakh crore, while net market borrowing is estimated at Rs 4.57 lakh crore.