The yields on the government bonds have risen to a three-month high with the 10-year benchmark bond closing at 7.93 per cent on Wednesday due to shortage of liquidity and the market prepared itself for a huge supply of fresh government debt of close to Rs 20,500 crore during the week.

The rise in yields is expected to harden interest rates further making credit dearer for companies, ba-nks, public and the government. Tightness in liquidity is going to get further aggravated due to the advance tax payout by September 15, which is expected to drain out another Rs 4,000 crore.

On Wednesday, government sold off Rs 8,000 crore of treasury bills (short term bonds of 91 days), Rs 1,500 crore worth of additional short-term securities (182 day) ahead of the Rs 12,000 crore of bond sales on Friday.

As fresh supplies of debt crowd the market and liquidity is tight, yields are poised to harden further, pushing up the interest rates. “The government borrowing at the short end of the market has pushed up short term bond yields and the long-term bond auction on Friday has pushed up prices on the yields on the long term bonds. Tightness in liquidity is also adding pressure on the yields and interest rates are set to harden,” said CVR Rajendran, head of treasury at Corporation Bank.

The Reserve Bank of India (RBI) in a circular dated August 6 had told banks to make disclosures on their held-to-maturity category of government stocks and not to book profits in between when the market is on an upswing.

“This is also forcing many banks to sit on excess government bonds on their books and discouraging them from an active participation in the market,” according to a trader.

The additional borrowing of the government during the financial year is going to put further pressure on the yields. “Tightness of the liquidity in the system and the higher borrowing from the government is certainly putting pressure on the yields.

The rise in yields will also put pressure on the interest rates in the system,” said Joydeep Sen, vice president (advisory) of BNP Paribas. Six banks borrowed about Rs 12,015 crore from the repo window of the RBI on Wednesday.

To fight inflation and to exit from a loose monetary policy, the Reserve Bank of India is expected to tighten its key policy rates further in the November review of the monetary policy.

manjuab

@mydigitalfc.com