Corporate bond yields slump on surplus liquidity

Falling yields on government bonds are being mirrored by the corporate bond segment, as sluggish credit growth and low interest rates lead to oversupply of money

The Reserve Bank of India (RBI) has shied away from hiking interest rates, largely because credit growth has failed to match up to its expectations. During November, the resulting surplus cash lying with the banking system has contributed to the decline in corporate bond yields which have slumped by 30-50 basis points to their lowest in nearly 3.5 months. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since 30th July.

RVS Sridhar, senior vice president for treasury at Axis Bank explained, “Bond yields are falling as a result of the relief rally, post the RBI's monetary policy review, as no rate hikes have been carried out. The hike in statutory liquidity reserve (SLR) led to a bullish rally on potential increase in demand which has fed into the bond segment too. Availability of sufficient liquidity amid lack of credit growth has led to a rally and credit spreads have shrunk.”
 
“Indian banks are waiting for disbursement to happen but actual disbursement is not picking up. RBI has not tightened the money supply and has not increased the rate to ensure good economic growth; all these factors resulted in excess liquidity in the market,” said Gautam Jain, senior analyst, RBS Equities.
 
“When current interest rate is lower than coupon rate of corporate bonds, the value of bond goes up more than the face value (as there would be more demand for higher coupon rate bond) and when the bond value is more than the face value, yield goes down as the holder of a corporate bond will be getting same coupon rate of interest on higher value of bond,” Mr Jain added.
 
According to RBI data, total bank credit since January increased a mere 9.8% over the corresponding period last year. In comparison, credit off-take registered a robust 27.7% growth during the same period last year. This has caused RBI to revise its credit growth target to 18% from 20% earlier this year.
 
Speaking on future movements in bond yields, Mr Sridhar said, “In the short term I believe the rally would be sustained until we see any concerns from RBI or inflation concerns. The rally may end in December as markets prepare for the January monetary policy review.”

Mr Jain opined, “I think, till December 2009 end, it is likely to remain at this level and from January 2010 onwards, it should move up. RBI may increase the interest rate to tackle inflation in their 10th January policy meet. There would be a pick-up in credit growth as normally credit grows well in the last quarter. Hence, I think from January-February onwards the bond yield should start moving up marginally.” – Sanket Dhanorkar [email protected]
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Jaggery, Rice and Sugarcane

Short-supply and growing demand from states such as Orissa, Bihar and Andhra Pradesh have led to a rise in the price of jaggery. Prices of black jaggery in Andhra Pradesh have already surged by over 50% in October 2009 to Rs275-Rs295/10kg from Rs170-Rs190/10kg in October 2008. From November 2009, prices are expected to drop by 10%-20% as jaggery supply would increase significantly and demand would decline with the end of the festive season.

India is likely to become a net importer of rice for the first time in 21 years in 2010. The kharif output because of deficient rainfall is forcing India to consider importing three million metric tonnes of rice next year. The kharif crop, which accounts for 80% of total output, may slump as much as 24% to 65 million tonnes, from 85 million tonnes a year ago. Central Board of Excise and Customs scrapped the 70% import tax to encourage imports.

The Union Cabinet has fixed a ‘fair and remunerative price’ (FRP) of Rs129.84 per quintal payable by sugar mills for cane procurement from farmers during the current 2009-2010 crushing season (October-September). The FRP will replace the Centre’s statutory minimum price (SMP) of Rs107.76 per quintal (linked to 9.5% basic recovery) that was announced on 25th June for the current season. The approved price is linked to a sugar-to-cane recovery of 9.5%. For every 0.1% increase over the basic recovery rate, mills would be obliged to pay premium of Rs1.37 per quintal.
 

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COMMENTS

kalpesh m

9 years ago

i have a lots of tin of jaggery i want to sell them

Copper

Between January 2009 and October 2009, the price of copper has shot up 125%. However, inventories of copper, monitored by the Shanghai Futures Exchange, stood at 102,835 tonnes as on 30 October 2009, up from 17,822 tonnes at the start of the year. China’s copper imports more than doubled in the first nine months of the calendar year to 2.6 million metric tonnes. Even on the London Metal Exchange (LME), inventories of copper stood at 371,725 tonnes. Rising inventories on the LME indicate lack of recovery in demand outside China. Rising inventories, demand worries and a stronger dollar may weigh on the price of the red metal.

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