Power Finance Corporation scraps bond sale as yields spike

MUMBAI: State-run Power Finance Corporation on Monday scrapped its plans to raise Rs1,500 crore in a bond sale after yields spiked following the Reserve Bank of India's hike in benchmark rates last Friday, said two bankers in the know of the development.

The company called off the bond offering as they were willing to pay a coupon of 9.60% for three years while the market was demanding 9.80% for three years,'' said one of the bankers who did not want to be identified. This was unacceptable to the company.

The yield on the government securities spiked on dampened hopes of interest rates easing anytime soon with nearly Rs 15 a litre of under recoveries of diesel waiting to be passed on.

With pass through of fuel prices, inflation may climb further leaving little scope for reducing rates. The yield on the 10 year paper hardened by 27 basis point to 8.85%.

The sentiment in the government securities market is negative after the Reserve Bank of India, governor, Raghuram Rajan hiked the key policy rate, repo rate-the rate at which banks borrow from the central bank by 25 basis point.

The yield on government securities saw significant hardening today,'' said a PFC executive who did not want to be identified. There was also devolvement in the auction held by the RBI. We had to thus call off the plan. We will take a call on the offering in the coming days.'' PFC chairman M.K. Goel confirmed the development.

The yields on benchmark 7.16% 10-year paper rose 8.85% as against 8.58% close on Friday on expectations that RBI would hike repo rate further by 50 basis points on December to control inflation.

However, dealers expects yields to soften on Tuesday after comments from the north block that the government borrowing will be within budgeted estimate and that the fiscal deficit target of 4.8% will be met despite revenue growth falling short of targhet.

Liquidity condition continues to be tight in the banking system as bank borrowing through the repo window crossed Rs1lakh crore on Friday and even a government bond sale devolved on primary dealers.