Bond Rally At Risk On Delayed Cash Transfer From The Central Bank

Bond traders in the country are a worried lot as a six-week rally is coming to an end.

An official said that a central bank panel would only make its recommendations on the transfer of reserves to the government next month. That surprised traders who were pricing in as much as a ₹3-lakh crore ($43 billion) boost to State coffers from the windfall.

“Market players will be heading back to the drawing boards to re-work the Budget math,” said Vijay Sharma, Executive Vice-President for fixed income at PNB Gilts in New Delhi. “Traders are jittery that the government may end up with higher borrowings, and if that happens, we may see more sell-off.”

Expectations of the bonanza from the Reserve Bank of India helped fuel a stellar rally in bonds that pushed down yields to their lowest since October 2017. With that in doubt, traders are concerned the government may exceed the ₹7.1-lakh crore of borrowings announced earlier.

The yield on the benchmark 10-year debt rose two basis points to 6.87 per cent on Tuesday after climbing as much as seven basis points on Monday from the intra-day day low amid reports about the delay in the panel’s recommendations. The disappointment may send the yield to as high as 7.10 per cent, according to Lakshmi Vilas Bank.

Clarity over the excess reserves would have been a critical component of Budget deficit estimates, said RK Gurumurthy, Head of Treasury at LVB.