Bond Market: The bond market is now a two-way street

MUMBAI: The Centre’s decision to reduce motor-fuel taxes seems to have split India’s bond market in the middle, with yields on the short end of the curve falling on expectations of a moderate policy rate hike and fixed debt yields on expectations of higher North Block loans.

Parul Mittal Sinha, head of financial markets at Standard Chartered Bank for India, said: “This has narrowed the short-term yield curve across the bond market. At the same time, concerns over high revenue deficits are boosting long-term yields.”

This trend could continue unless the Bond market is convinced of the North Block’s ability to collect higher revenues despite the reduction of fuel taxes.

To be sure, New Delhi’s debt is expected to increase by more than ₹ 1 trillion due to higher fertilizer subsidies.

According to Bloomberg data, government bonds maturing in the next two to five years are down 4-7 basis points. In contrast, 10-year benchmark yields rose six basis points throughout the day but closed at 7.39% on Monday, up from 7.36% on Friday. One base point is 0.01%. Bond yield and price have an inverse relationship.

“Perhaps the target for the second half of the loan is to cut the excise duty and amend the higher subsidy bill,” said Rajiv Radhakrishnan, chief investment officer, fixed income.

Mutual funds.


Steps taken

Radhakrishnan said, “Currently, short-term yields are being checked as government measures will help increase rates in the future.”

The relatively low liquid 14-year and 30-year sovereign gauges increased 1-3 basis points.

Over the weekend, the Center decided to reduce the central excise duty on petrol and diesel. It also provided a subsidized window for cooking gas cylinders in the face of rising consumer prices. Inflation, measured by the Consumer Price Index, reached an eight-year high of 7.79% in April, with the wholesale inflation gauge rising to a record high of 15.08%.

On May 4, the Reserve Bank of India (RBI) raised the policy repo rate by 40 basis points in an unspecified monetary policy announcement, citing the risk of consumer prices skyrocketing. Subsidy burden and auto-fuel revenue sacrifice could prompt further borrowing by the government, which had earlier planned to borrow Rs 14.21 lakh crore. Sellers expect the total debt target to be overshot.

“With the move on fuel prices, it is now a two-pronged attack on inflation,” said Vijay Sharma, executive vice president.

Gilt. “The first is through financial response and the second is through financial response. It will have a financial impact – on the revenue of the lower government.”

This could further tighten the curve where short-term securities are better supported by expectations of lower rate growth, while longer securities are under pressure due to the hidden danger of increased debt, dealers said. Analysts expect that the headline reduction in excise duty on petrol and diesel could have an impact of about half a percentage point on CPI inflation, factoring both the direct and secondary effects.

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