The yield curve in current fiscal year is falling due to cuts in key rates. But the yield curve could steepen if the credit growth picks up.Consequently,
the Indian yield curve has flattened considerably, with
the spread between the overnight money rate and the
10-year benchmark gilt yield declining from around 340
bp in 2001 to around 60 bp as of now. The benchmark
10-year gilt yield itself has come down from 12.08%
as of March 2001 to the current levels of around 5.10%.
This has been the effect of cuts in the key rates such
as bank rate, repo rate and CRR over the last few years.
It
came as a surprise that in the mid-term review of the
credit and monetary policy, RBI did not prefer going
in for another bank rate cut as was widely expected.
That there would be no cut in the repo rate and CRR
was already discounted especially after the RBI talked
the yields up when the 10-year G-Sec yield touched a
historic low of 4.94% mid-October. This raises a significant
question is the fall in interest rates over? Let us examine
the premises on which the yields have fallen and the
yield curve flatted this fiscal. The beginning of the
fiscal saw the 10-year gilt yield open at 6.15%. RBI
cut the repo rate by 50 bp. Forex reserves have grown
from US$74.805 bn as on March 28, 2003 to US$90.353
bn by October 10, 2003, an addition of US$15.548 bn.
The sterilization of the US$ inflows by the Central
Bank saw huge inflows of rupee in the system, which
can be gauged by the data of the average daily LAF repo
from April till October 2003 being around Rs.32,118
cr.
The
last two years have seen RBI skewing issuance of securities
in the longer maturity end. The shorter end comprises
of securities that have a relatively high coupon and
carry a high premium, making the segment unattractive
due to the pull to par effect. Trading interest, therefore,
shifted to the medium to longer maturity securities. |
