Long-term investors rush to buy Gilts before rates fall

MUMBAI: Depositors may be shying away from banks due to dipping rates, but long-term domestic debt investors such as insurers and pension funds are now busy shopping for sovereign bonds just ahead of Diwali as yields are looking attractive.

“Long-term investors look to buy G-Secs at every dip,” said Badrish Kulhalli, fund manager, fixed income, HDFC Life Insurance. “The benchmark yield has not fully transmitted into RBI's surprise rate cut this time.” “Rather, the impact has been quite limited as there was a high G-Sec supply in October, keeping the supply-demand balance tilted adversely,” he said. The benchmark yield has not really followed the central bank’s borrowing cost reduction path due to higher supply of securities. The gap between the repo rate and benchmark yield is at 95bps against 50 basis points before the September monetary policy.

So far this calendar year, the Reserve Bank of India has cut the benchmark repo rate — the rate at which banks borrow short-term funds from the central bank — by 125 bps to 6.75%. Bond markets have transmitted the rate cut benefits faster than commercial banks, barring the last occasion on September 29, when the RBI cut borrowing costs more than anticipated. The RBI sold Rs 75,000 crore sovereign securities in October alone, the largest single-month government borrowing size in H2 of the fiscal year. During November, the RBI will offer a lower quantity at Rs 45,000 crore worth of sales.

“Bond yields may start falling after the air clears over US Fed policy action expected in December,” said Soumyajit Niyogi, analyst, interest rates, SBI DFHI Primary Dealers. “The gap between repo and benchmark yields would narrow with demand from domestic institutional investors along with follow-on expected RBI rate cuts.” The benchmark yield is hovering at 7.65% after dipping to 7.54% on the day the RBI announced the rate cut last September. Yields and prices move in opposite direction.