Business Standard

Yields drop on Fed’s rate-cut signal

- ANJALI KUMARI Mumbai, 21 March

Government bond yields fell on Thursday, mirroring the decline in US Treasury yields, which softened following the outcome of the US Federal Reserve (Fed) meeting. The rate-setting panel opted to keep rates unchanged and maintained its projection for three rate cuts throughout 2024.

According to CME’S Fedwatch Tool, the expectatio­ns of a rate cut in June rose to about 74 per cent after the Fed’s decision, compared to 59 per cent a week ago.

The yield on the benchmark 10-year government bond fell by 4 basis points to settle at 7.05 per cent on Thursday, down from 7.09 per cent on Wednesday.

“The market gained positivity after the Fed meeting as they said there will be three rate cuts,” said a dealer at a state-owned bank. “Then, the demand at the state developmen­t loan auction was also good,” he added.

Two states raised ~24,000 crore at the additional state bond auction today. The cutoff yield on the 10-year state bond was set at 7.42 per cent, compared to the range of 7.44 per cent to 7.5 per cent in the previous auction on Tuesday.

“Banks were there, but pension funds and insurers were the major participan­ts,” said a dealer at a state-owned bank.

“The yield (on the benchmark 10-year government bond) should remain around 7.05 per cent. We will need one more positive news for it to fall below that,” he added.

Meanwhile, the Reserve Bank of India (RBI) conducted a five-day variable rate repo (VRR) auction as the deficit liquidity in the system neared ~1 trillion, and the weighted average overnight money market rates rose to 6.73 per cent near the marginal facility rate, said market participan­ts.

The central bank received bids worth ~71,252 crore, against a notified amount of ~50,000 crore at the auction.

The liquidity deficit in the banking system widened to ~97,529 crore on Wednesday, from ~54,248 crore on Tuesday, according to the latest data from the RBI.

Market participan­ts said that the liquidity deficit widened due to advance tax payments. A total of around ~2 trillion outflows are expected until March 31.

The central bank will conduct another 14-day VRR auction on Friday to infuse ~25,000 crore into the system.

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