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Govt debt market boom ends

Yashajit Saha

The boom in the government securities market is over. Money market dealers and fixed income analysts feel that though the Reserve Bank of India will keep the market liquid and that the interest rates will remain soft, they rule out the possibility of yields on government paper drastically dipping, as happened last year.

Sanjit Singh, fixed income analyst at ICICI Securities and Finance, said: "A boom of last year's magnitude is not possible. The market will be highly volatile, in contrast with the secular downward trend of yields in 2001-02." Singh's prediction was based on the RBI not cutting the bank rate in the Credit Policy.

"If the central bank does not give any further signal by the first week of June, the yields on long-term paper are likely to go up, increasing the spread between the short and the long end of the market," he added.

The yields on government paper dropped by two to three percentage points across maturities over one year.

The two-year sovereign paper yield, at 8.99 per cent at the beginning of fiscal 2002 dropped to 6.20 per cent by the beginning of 2001-02.

For the 10-year paper, the dip was from 10.19 per cent to 7.25 per cent. The 20-year paper went down from 10.99 per cent to 7.79 per cent.

But after the credit policy, yields started moving up. On May 11, the yield on the 10-year paper stood at 7.67 per cent, while that on the 20-year paper increased to 8.27 per cent. The yields on two-year and five-year government paper were 6.76 per cent and 7.15 per cent, respectively, on May 11.

"What has happened since the credit policy are a knee-jerk reaction to the policy and the gilts scam. However, I expect the yields will be corrected downward very soon. The yield on 10-year paper will be stabilised in the range of 7.40- 7.50 per cent for the next three months," Ravi Chikhilikar, chief of fixed income and treasury at BNP Paribas, said.

The dip in yields last year was largely due to lower credit offtake and the accretion in foreign exchange reserves.

As on April 5, 2002, bank credit in the commercial sector grew year-on-year by 14.2 per cent versus 18.3 per cent during the corresponding period last year.

The foreign exchange reserves of the RBI went up by $11.898 billion during 2001-02 to $54.154 billion, releasing around Rs 670 billion in the market. Dealers pointed out that ICICI purchased government paper of Rs 200 billion from the market. This helped to push up yields.

However, during 2002-03, credit offtake is likely to pick up if an industrial recovery gets under way by the second quarter. Moreover, co-operative banks hold government paper in excess of the statutory liquidity requirements.

Part of this is likely to be offloaded in the market because the gilts scam has proved excess holdings can be risky.

"If the RBI maintains liquidity, we will see range-bound trading. There will not be a major rise in yields on government paper, but a drastic fall in yields is also not likely," said N Balasubramanian, chief of global markets at ICICI Bank.

According to him, the yield on 10-year paper is likely to be in the range of 7.30-7.80 per cent, at least in this calendar year.

Parthasarathi Mukherjee, treasurer of UTI Bank, however, denied that the downturn in yields on government paper is over.

"A correction is going on. Though we do not expect a drastic dip in yields, we hope there will be a turnaround in seven days."

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