The central government yesterday announced its borrowing program for H1FY10 at Rs2.4tn that was much higher than our expectations of Rs1.2-2.0tn. Alongside the RBI also announced some measures to provide stability to bond yields in the wake of such high borrowings. The RBI is likely to pump in Rs1.2tn into the market through OMOs (open market operations) and unwinding of MSS (market stabilization scheme). Another Rs1.01tn will likely come from the repayment of the old bonds. Also the RBI has leeway to reduce the cash reserve ratio (probably upto 100bps) next year and release another Rs400bn into the market.
We do not expect further hardening of the bond yields in near future and they may hover around 6.5-7.0% range. However, one could expect increased volatility as the RBI has not announced any certain pattern for the OMOs.
Impact of hardened bond yields on banks is negative as the value of bond portfolio of banks gets eroded thus putting pressure on their profits.
Global Cues: The US mkts continued their upsurge of past few days. The better than expected earnings performance from corporates & GDP data on expected lines provided impetus to the mkts. The Dow ended the day with a gain of 170 points while NASDAQ & S&P were also up between 2-2.5%.
Asian mkts are also trading with decent gains. Almost all of them are trading up by 1%. However SGX is trading flat with almost no gains.--~--~---------~--~----~------------~-------~--~----~
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