At 2pm, the yield on 10-year government bonds was at 7.349%, down 0.05 bps from its Wednesday’s close of 7.399%

India’s 10-year bond yield on Tuesday declined by 5 basis points (bps) after the Reserve Bank of India (RBI) allowed banks to spread its bond trading losses.

At 2pm, the yield on 10-year government bonds was at 7.349%, down 0.05 bps from its Wednesday’s close of 7.399%. Markets were shut for five days due to holiday.

With this central bank’s move, analysts expect state lenders, which are the biggest holders in debt, will be back to the market.

According to the RBI circular on Monday, banks can spread provisioning for mark-to-market (MTM) losses incurred during December 2017 and March 2018 equally over up to four quarters.

Since the last six months, bond yields have surged over 100 bps due to concerns of rising crude oil prices, widening current account deficit, reduction in banking liquidity and the prospect of faster rate hike by the US Federal Reserve.

Last month, Credit Suisse warned that India’s state-run banks could lose more than Rs20,000 crore in the January-March quarter, due to a continued spike in bond yields and as they held more bonds than are required by the regulator.

“RBI’s move would provide regulatory breathing space in terms of capital for the time being, but no meaningful changes in bond market. An endeavour to iron out treasury losses/gain through investment fluctuation reserve is a good move given rising exogenous influence on domestic interest rate markets,” said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. Ltd.

The move came just days after the government unexpectedly reduced its fiscal borrowing programme for the first half of the year. On 26 March, the government said it will raise Rs2.88 trillion by selling bonds in the six months to 30 September, about 48% of its budgeted bond sales in the first half, lower than the 60-65% in previous years.

For FY19, the total gross borrowings through government securities is budgeted at Rs6.05 trillion, higher than previous year’s revised estimated of Rs5.99 trillion.

Traders will also focus on the RBI’s policy decision Thursday. According to a Mint poll, the central bank will keep interest rates unchanged in the first monetary policy review of the current fiscal year, amid a gradual recovery in growth and easing inflation.

The central bank will, however, keep a close watch on increased risks to inflation posed by rising oil prices and higher minimum support prices for farm products, according to 15 economists surveyed by Mint.

“We are now focusing on RBI rate review and new FPI framework. Bonds are likely to trade with a positive bias in the near term, though we maintain our cautious view longer out, particularly as second half supply pipeline is likely to turn busier thanks to centre and states’ borrowings, at the risk of crowding out private sector demand,” said Radhika Rao, economist at DBS Bank.

Meanwhile, rupee traded higher at 65.07 and was trading at 65.01, up 0.26% from its previous close.

source: livemint.com