YIELD ON GOVT BONDS DECLINES IN SOME RELIEF TO BANKS

MUMBAI: The yield on government bonds fell in the last trading session of 2017 after the Reserve Bank of India (RBI) cancelled part of the scheduled bond auction, bringing some relief to banks, which feared higher losses in their bond portfolios.

The 10-year bond yield ended at 7.326%, down 7 basis points from its previous close of 7.396%. Bond prices have fallen more than 80 basis points this year, making it the worst year since 2009. Bond prices and yields move in opposite directions.

Of the total ₹15,000 crore in bonds up for auction, RBI sold only ₹4,000 crore worth.

According to the auction results, RBI did not accept bids for bonds due in 2022 and 2031. Against a total of ₹11,000 crore worth bonds on sale in two categories, RBI received bids worth over ₹25,985 crore.

The reason for the rejection of bids was not clear.

The fall in yields on Friday, also the last trading session of the quarter, will help banks by reducing the provisioning required to cover losses on their bond portfolio.

Banks have to revalue their bond portfolio at the end of every quarter. In case the value of the securities is lower than the market rate, they are mandated to keep aside funds as mark-tomarket provisioning.

“There will still be mark-tomarket provisioning because yields have risen sharply. But with today’s fall, the total provisioning requirement by banks is expected to come down by around 50 basis points (in price terms),” said Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Financial Services.