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New 10-year govt bonds issued at 6.97 per cent

Anup Roy  |  Mumbai 

The government on Friday auctioned a new 10-year benchmark bond at a cut-off yield of 6.97 per cent. This is the first time since July 2009 that a benchmark 10-year bond has been issued at below seven per cent coupon rate. On Friday, the last trading day under Reserve Bank of India Governor Raghuram Rajan, rupee closed at 66.83 a dollar and foreign exchange reserves stood at $366.77 billion, up from $274.8 billon when Rajan took over on September 4, 2013. The total notified amount was Rs 8,000 crore against which 203 bids worth Rs 41,461 crore were received by the central bank. The auction was part of Rs 14,000 crore of bond issuance by RBI. The existing 10-year benchmark closed at 7.11 per cent.

The government has raised Rs 87,000 crore through the existing bond that was issued at a coupon of 7.59 per cent in January this year. The new 10-year benchmark bond will take some time before becoming the most-traded bond, but dealers say the potential for yields to fall substantially below the coupon rate is limited. "The bond yield can fall only when there is clear visibility of RBI cutting rates," said a senior bond dealer with a foreign bank who was not allowed to speak with the media. Even as medium-term interest rate of the economy is technically below seven per cent, banks have not reduced their rates at a time when they are seeing their margins getting compressed by rising bad debts. This, in some sense, is detrimental for retail borrowers even as better-rated corporate firms are able to raise cheaper funds from the bond market. The bond market has fully transmitted RBI's 150-basis-point rate cuts from January 2015 onwards, but banks have only transmitted about half the rate cuts. As a result, Indian firms are moving away from the banking channel to the bond market.

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First Published: Sat, September 03 2016. 00:11 IST
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