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Bond yields slip below 6% again on RBI measures, but pare losses

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NEW DELHI: Bond markets welcomed RBI’s policy rate cut on Friday as yields on 10-year sovereign bonds, which also act as a benchmark, slipped over one per cent, paring initial losses. Yields on 10-year bonds quoted at 5.97 per cent after hitting a low of 5.87 per cent (down 2.65 per cent from previous close), immediately after the policy announcement. This was the first instance since May 14 when yields have dropped below 6 per cent in intraday trade.

“The 40 bps repo rate cut was the need of the hour, given the depressed economic activity and demand collapse. However, another RBI rate cut was factored in and as a result India 10-year sovereign yields have moved lower slightly,” said Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities.

RBI said it has infused Rs 9.42 lakh crore into the market since February 6 through multiple rounds of OMOs, targetted long-term repo operations and of dated securities purchases , among various measures.

Analysts on Dalal Street expect more policy response from RBI in the future in terms of further rate cuts and OMOs to bring down the yield curve, possibly even to monetise government borrowings. They, however, felt the rate cut might not be effective because of gaps in transmission.

“We believe rising risk perception is holding back monetary transmission and hence rate cuts will not be effective. Excess liquidity in the banking system and a fall in money market rates and some lending rates are not signalling any improvement in financial conditions,” said Prithviraj Srinivas, Economist, Axis Capital.

“Liquidity needs to reach every part of the economy even when it has become difficult to distinguish between good credit and bad credit. We believe RBI/public sector will need to stand ready to become a lender of last resort, not just for banks, but all financial institutions,” he said.

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