Yields on benchmark bonds have risen 22 basis points since the budget announcement that the government would borrow more this year and of an elevated borrowing calendar next year. When bond yields rise, prices fall.
The gauge recouped part of its losses on select profit booking by public sector banks. The benchmark yielded five basis points lower to 6.08 per cent Wednesday.
“The noteworthy aspect of the budget is the substantial ‘cleaning up’ of below the line items and indirect sources of financing, as well as relatively conservative projections on revenues,” said Suyash Choudhary, head of fixed income at IDFC MF.
The central bank, which will announce its bi-monthly monetary policy on Friday, is expected to spell out measures to check rising yields. It may announce more bond purchases through Open Market Operations. Alternatively, it can buy bonds from the screen through the secondary market at a later stage.
“Speculative bets have risen in the Gsec market in the past few days,” said Ajay Manglunia, managing director – fixed income at JM Financial. “Traders are now staring at the policy statement as they seek RBI’s take on the budgeted fiscal and borrowing numbers.”
“A central bank intervention is expected to come sooner or later, which is a quintessential factor to check any rise in federal funding costs,” he said.
Public sector banks net bought about Rs 15,000 crore worth of government bonds on Monday and Tuesday. Those banks are likely to have sold parts of their holdings Wednesday earning some profits.
The budget was not particularly expansionary as well with the government rather focusing on creating enabling conditions for private capital to flow in, said Choudhary.
Six-month Overnight Indexed Swap, a future rate gauge, yielded 3.63 per cent Wednesday compared with 3.68 per cent on the budget day. This indicates, traders are expecting yields to soften next few months although those remain elevated ahead of the bi-monthly policy this week.